annual report & accounts 2008 - bradford &...

Annual Report & Accounts2008

B21448 R&A 2008 FRONT 23/3/09 13:33

01Bradford & Bingley Annual Report & Accounts 2008

Contents

Directors’ report02 Chairman’s statement03 Introduction05 Business review07 Key performance indicators08 Financial review14 Our Board16 Corporate governance19 Risk management and control23 Directors’ remuneration report 30 Corporate social responsibility31 Statement of Directors’ responsibilities32 Other matters

The accounts36 Independent Auditor’s report37 Consolidated income statement38 Balance sheets39 Statements of recognised income and expense40 Cash flow statements41 Notes to the financial statements

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Directors’ reportChairman’s statement 2008 was a turbulent year for British banks, and a very disappointing year for Bradford & Bingley.

Against a deteriorating economic background, which first became apparent in the third quarter of 2007, the Board took a series of prudentfinancial decisions to dispose of non-core lending portfolios, to raise committed, secured wholesale funding facilities and to seek additional capitalvia a rights issue.

I joined Bradford & Bingley as Chief Executive on 18 August 2008, the day on which the rights issue closed, and set about addressing some of theoperational issues that needed attention. We cut mortgage sales capacity further; reduced our commitments to third party mortgage providers;increased our sales focus on retail deposits; tackled our costs; addressed balance sheet risk; and intensified our efforts in mortgage arrearscollections.

External events in September 2008 materially affected public confidence in the banking system, with a number of financial institutions in the USAcollapsing or being supported by government intervention. In the UK, the takeover of a distressed HBOS and considerable media attentioncontributed to an increase in the rate of withdrawals of our customer deposits.

On 27 September, the Financial Services Authority (‘FSA’) informed us that Bradford & Bingley no longer satisfied their conditions for operating as adeposit taker, and on 29 September, in order to promote financial stability and to protect consumers, Her Majesty’s Treasury (‘HM Treasury’) tookownership of Bradford & Bingley and sold the UK and Isle of Man retail deposit business to Abbey National plc (‘Abbey’). This was a hugelydisappointing outcome for the organisation. Although we had a difficult last week of trading, thanks to the efforts of colleagues, there werequeues outside only four branches and every customer was served before we finally shut our doors on Saturday 27 September.

Since these events, the business has undergone enormous change. Colleagues working in our retail deposit business were transferred to Abbeyand we are providing transitional services to enable Abbey to operate the businesses they acquired.

We have also set about reducing costs significantly to reflect the reduced business we are now running. When I joined in August, we employed3,061 people and by 31 December 2008 this was down to 995 (942 full time equivalent). This has obviously been a painful period of adjustmentfor the organisation and I would like to thank colleagues for the way in which they dealt with these issues and for their continued service to ourcustomers. Indeed, throughout this period it was pleasing to see from our customer surveys that mortgage customer satisfaction had actuallyincreased in December from the level in June.

We have tried to simplify this Annual Report & Accounts as much as possible, whilst complying with best practice, but unfortunately it is morecomplex to read than would usually be the case due to the mixed year we have had, with the first nine months including the retail depositbusiness, and the last three months being a mortgage business only. The profit before tax for 2008 was £134.3m which includes the benefit ofthe sale of the retail deposit business, some other one-off gains and the benefit of the interest-free liability to the Financial Services CompensationScheme ( ‘FSCS’) net of the cost of the guarantees provided by HM Treasury. These effects are explained in detail in the Financial Review startingon page 8.

There have been significant board changes during the year, with three executive directors leaving, including the previous Chief Executive, StevenCrawshaw, who retired due to ill health. Rod Kent, our previous Chairman, took on a challenging executive role during Steven’s absence anddeclined any additional remuneration. Rod and the majority of the non-executive directors, stood down without compensation on 14 November2008 and I would like to thank them for their contribution.

I am delighted that Non-executive Directors Michael Buckley and Louise Patten agreed to stay in their non-executive roles and assist me when Ibecame Chairman following Rod’s resignation. Executive Directors, Chris Willford and Roger Hattam, have also remained and worked hard ondeveloping the new business plan, and are expected to stand down during 2009 following the appointment of a managing director. The supportof all four colleagues, together with the senior management team, has been invaluable and is much appreciated.

2009 is going to be a further year of change and the Bradford & Bingley team will be working hard to protect the value of our assets and tominimise the risk to taxpayers. We aim to continue to give excellent service to our customers and, whilst we undertake further restructuring toreduce costs, we intend to minimise any adverse impact on the Aire Valley community.

Richard PymChairman


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Directors’ reportIntroductionBackground to public ownershipThe dislocation in global credit markets and the subsequent decline in the UK housing market from the third quarter of 2007 onwardsmade the trading environment for Bradford & Bingley (the ‘Company’ or the ‘Group’) more difficult in a number of ways:

• the availability of wholesale funding reduced rapidly and materially; • the cost of both retail and wholesale funding increased; • the market value of some of the Group’s treasury assets reduced substantially; • mortgage arrears increased; and • customers found it more difficult to secure mortgages elsewhere reducing the rate of redemptions and thus increasing Bradford &

Bingley’s funding needs.

In response to these more challenging conditions, the Company disposed of £4.0bn of non-core lending portfolios, increased retaildeposit balances by £2.1bn in the first four months of 2008, and raised a further £2.0bn of committed, secured facilities. The Boardannounced a rights issue in May 2008 to raise additional capital with a view to achieving a tier 1 capital ratio of between 8% and 10%. Itbecame apparent during this capital raising process that Bradford & Bingley’s trading outlook for the year had deteriorated. On 2 June2008, the Board therefore issued a trading statement and restructured the rights issue at a price that better reflected the latestinformation on trading. The proposed restructured capital raising included a significant investment from the private equity firm, TPG. Thiswas followed by a downgrade in Bradford & Bingley’s short-term credit rating from the major rating agencies.

On 4 July, Bradford & Bingley’s long-term credit rating was reduced by Moody’s, which entitled TPG to withdraw its proposed investment.A replacement, enlarged rights issue of £401m was quickly agreed with the support of major investors and the appointed underwriters. Itwas approved by shareholders on 17 July. The downgrades and adverse publicity resulted in a reduction in retail deposit balances in Julywhich lasted into August when the balances stabilised.

A succession of external events in the first half of September materially affected public confidence in the banking system, particularly inmortgage banks. The collapse and effective nationalisation of AIG, Fannie Mae and Freddie Mac; the downgrading of Washington Mutualto ‘junk bond’ status; the collapse of Lehman Brothers; and the announced takeover of HBOS by Lloyds TSB coincided with Moody’sapplying a further downgrade to Bradford & Bingley’s ratings on 16 September. Fitch Ratings and Standard and Poor’s followed suit on 23September.

During the week commencing 22 September, a number of steps were announced to cut costs and reduce risk. However, mediaspeculation about the health and future independence of Bradford & Bingley increased, there was a significant increase in the rate ofwithdrawals of customer deposits, and wholesale markets continued to be severely restricted. Throughout this period, the seniormanagement team of Bradford & Bingley was in regular and close contact with the Bank of England and the FSA.

On Saturday 27 September, the Board was informed that the FSA considered that Bradford & Bingley no longer satisfied ‘thresholdconditions’ for operating as a deposit taker. Over the weekend of 27-28 September, the HM Treasury took steps to transfer the assets andliabilities of Bradford & Bingley into public ownership through the transfer of it’s shares to HM Treasury. Bradford & Bingley’s UK and Isle ofMan deposit businesses, together with the branch network and the shares in its Isle of Man subsidiary, were transferred to Abbey for£612m with effect from Monday 29 September, hereinafter referred to as ‘the Transfer’.

Transfer into public ownership On 29 September 2008, Bradford & Bingley was taken into public ownership in accordance with The Bradford & Bingley plc Transfer ofSecurities and Property etc. Order 2008 (the ‘Transfer Order’).

At the point of the Transfer, Bradford & Bingley held total assets of £52.5bn, including loans and advances to customers of £42.2bn, ofwhich £41.3bn were residential mortgages and £0.9bn were commercial and housing property loans.

These assets were funded by a range of wholesale funding vehicles (securitisations, covered bonds and unsecured wholesale funding)representing liabilities of £28.4bn and retail deposits of £20.4bn, including £1.4bn in the Isle of Man business.

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Directors’ reportIntroduction continued

In accordance with the terms of the Transfer Order, 1,684 employees of Bradford & Bingley (1,523 full time equivalent) transferred toAbbey, as well as 197 branches (160 leasehold and 37 freehold) and 140 agency branches (franchises).

The retail deposits transferred to Abbey were replaced simultaneously with a Statutory Debt (the ‘Statutory Debt’) totalling £18.4bn owedto the FSCS. The consideration received for the sale of the retail deposit business to Abbey amounted to £0.6bn, which was settled by thetransfer of £19.0bn of net liabilities. Simultaneously, HM Treasury provided a guarantee with regard to certain wholesale borrowings andderivative transactions with the Company existing at the time of the Transfer.

In addition to the £42.2bn loans and advances to customers, Bradford & Bingley also held £7.9bn of wholesale assets, comprising loansto central banks and other banks and debt securities in issue. The balance sheet value of derivative assets was £2.1bn, primarilyassociated with the fair value of cross currency and interest rate swaps used to reduce risk on the balance sheet. The remaining £0.3bnassets were fixed and other assets.

Immediately following the Transfer, Bradford & Bingley’s balance sheet was primarily financed by wholesale funding and the StatutoryDebt. In addition, Abbey continued to provide a loan of £1.6bn to Bradford & Bingley in respect of the Isle of Man deposit business it hadacquired. The remaining liabilities consisted of £1.5bn subordinated debt and other capital instruments, £1.5bn equity and reserves, and£0.9bn of derivative and other liabilities.

Following the Transfer, the Group was required to cease new lending activities immediately. Other than honouring outstanding mortgagecommitments, the business was transformed from a mortgage and deposit taking bank into a mortgage servicing bank, with ongoingobligations in the wholesale money markets, to HM Treasury, the FSCS and to Abbey in servicing the retail deposit business and branchnetwork.


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Directors’ reportBusiness review Now that it is in public ownership, Bradford & Bingley will be wound down. Its over-arching objectives are to repay HM Treasury and FSCSas soon as market conditions allow, and to protect taxpayers, whilst also treating customers and creditors fairly.

In order to achieve this, Bradford & Bingley will pursue the following strategic priorities:

• Run down the balance sheet• Minimise impairment and losses• Restructure and realign the business• Provide transitional services to Abbey

Running down the balance sheetAt the point of the Transfer, Bradford & Bingley held total assets of £52.5bn, including loans and advances to customers of £42.2bn, ofwhich £41.3bn were residential mortgages and £0.9bn were commercial and housing property loans.

The intention is to run down the balance sheet in an orderly fashion over a number of years in order to repay providers of funding,including HM Treasury and the FSCS. Although the current dislocation in global credit markets and the current difficulties in the UKhousing market impose significant constraints, Bradford & Bingley aims to run down its balance sheet through a range of activities:

Cease new lending- On 29 September 2008, Bradford & Bingley closed its doors to new mortgage applications altogether, and committed to lend only

where a formal mortgage offer had already been made. Customers who had paid fees for valuations were refunded. - Bradford & Bingley has also ceased to increase loans to existing customers, except in specific circumstances where doing so supports

the strategic priorities of running down the balance sheet or minimising impairments and losses. Run down the mortgage book through stimulating redemptions and sales of loans where appropriate

- A number of actions have been taken to facilitate mortgage redemptions, and there are plans for additional initiatives with the sameaim.

- These actions include the effective cessation of retention lending, and a promotion which waives early redemption charges forcustomers who redeem all or part of their mortgage between 1 February and 1 June 2009.

Run down or sell the commercial loan book- Where deals with commercial mortgage customers mature, the business is encouraging customers to refinance with other institutions

rather than renewing the loan.- Bradford & Bingley will seek opportunities to accelerate the run down of the commercial mortgage book through disposals if this can

be done on commercially acceptable terms. Run down or sell other wholesale assets

- Bradford & Bingley also holds a number of non-mortgage financial assets, which include mortgage and other asset-backedsecurities, government bonds and principal-protected structured investment products.

- Bradford & Bingley intends to dispose of wholesale assets which have not been encumbered or required for operating liquidity,provided that it can achieve acceptable prices in the market.

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Directors’ reportBusiness review continued

Minimising impairment and lossesThe performance of the Bradford & Bingley mortgage book deteriorated sharply during 2008. At the end of 2008, the proportion ofaccounts more than three months in arrears or in possession stood at 4.60% (2007: 1.63%). In the prevailing economic environment,further deterioration in the arrears rate should be expected in 2009 and 2010.

All mortgages are secured against property, so a shortfall in payments does not necessarily lead to a loss. The level of loss will ultimatelydepend on the amount of equity in the property and market conditions at the point of sale.

Bradford & Bingley intends to minimise impairments and losses through a number of key activities:

• Manage mortgage arrears through an active collections strategy • Increase focus on collections from larger portfolio landlords• Offer a range of treatment strategies to customers facing payment difficulties• Pursue recoveries

Bradford & Bingley’s approach towards customers in arrears is governed by the FSA’s Mortgage Conduct of Business (‘MCOB’) rules andthe principle of Treating Customers Fairly (‘TCF’), alongside the recently introduced Pre-Action Protocol (‘PAP’). In accordance with PAPguidance, all reasonable efforts will be made to make arrangements with customers in arrears and repossession will only be consideredas a last resort. Bradford & Bingley will not instigate litigation proceedings on owner occupied properties within the first three months ofthe customer going into arrears and will not take possession within the first six months.

Bradford & Bingley fully supports assisting borrowers during the current economic downturn and is willing to supplement existing effortswith recent Government initiatives, such as the Mortgage Rescue Scheme and the proposed Homeowners Mortgage Support Scheme, ininstances where our existing forbearance options have been exhausted.

Restructuring and realigning the businessBradford & Bingley is currently being restructured in order to realign the business behind its new, more focused objectives. In so doing, theintention is to:

• Reduce costs• Manage the impact on the community

The focus of the new Bradford & Bingley will be on running down its balance sheet, servicing the mortgage book as efficiently as possibleand on the collection of arrears. A range of alternative business models will be evaluated. Businesses in run-down face particularchallenges as economies of scale reduce over time and an out-sourced model represents one of the options which could mitigate this.

Bradford & Bingley has, for some time, been one of the largest employers in the Aire Valley. Bradford & Bingley will work with YorkshireForward, the regional development agency, and Bradford City Council to ensure that any negative community impact is managed.

The community impact will be taken into account when developing the new operating model. It may be that an out-sourced model is thebest way of retaining a level of employment in the Aire Valley, as an out-sourced provider may be able to locate its ongoing businessactivities here.

Providing transitional services to AbbeyBradford & Bingley has agreed to provide Abbey with transitional services until 29 September 2009, with an option to extend by a furthersix months to support the transferred branch and retail deposit business during the process of separation and migration. Services duringthis transitional period include IT service delivery, application maintenance, finance and accounting administration, bankingadministration and payment processing.

Abbey has agreed to provide a range of reverse services to Bradford & Bingley for the same duration, including counter services andacceptance of payments by Bradford & Bingley mortgage customers in former Bradford & Bingley branches.


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Directors’ reportKey performance indicators

As a consequence of the Transfer and the change in the objectives of the business the Boardhas reviewed the key information used to manage the business in the future. In addition to theprimary financial statements, we believe the following key performance indicators aresignificant in managing the challenges we face and demonstrate how the business isperforming against its strategic priorities.

Profit before tax*

134.3

£m

126.0

08

07

Cost:assets ratio

0.50

%

0.56

08

07

Lending balances

41.8

£bn

40.4

08

07

Wholesale asset balances

7.5

£bn

9.6

08

07

The profit of the business is the income made for the shareholder after allexpenses and charges. It is a measure of the success of the delivery ofthe strategic priorities.

The ongoing expenses of the business expressed as a proportion ofaverage interest-earning assets. It measures the effectiveness of theGroup in reducing costs relative to the size of the assets undermanagement.

The total balance of mortgages and commercial property loansoutstanding defines the size of the operational capacity required by thebusiness. As the business is run down, changes to this balance willmeasure the speed at which funding can be repaid and operationalcapacity reduced.

Along with outstanding loans to customers, the Group also has amaterial balance of wholesale loans and investment assets.

Residential mortgage redemption rate

10.6

%

18.5

08

07

The value of residential mortgages redeeming in the period expressedas a proportion of the total balance at the start of each period. Thismeasures the rate at which the residential mortgage book is reducing.

Residential arrears balance: total mortgage balance

0.27

%

0.12

08

07

The value of payments that have not been made by customers as aproportion of the total balance of all mortgages. This measurerepresents the degree to which mortgages are not performing and isan indicator of performance in managing the level of losses.

*The 2008 profit before tax includes the benefit of the sale of the retail deposit business, some other one-off gains and the benefit of the interest-free Statutory Debt net of thecost of the guarantees provided by HM Treasury. These effects are explained in detail in the financial review starting on page 08.

Directors’ reportKey performance indicators

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Directors’ reportFinancial review SummaryGroup profit before tax rose 7% to £134.3m (2007: £126.0m). This profit includes the positive financial impact of items that were a directconsequence of the Transfer, or events following from it. These were:

• the interest-free Statutory Debt of £18.4bn net of the cost of the guarantees provided by HM Treasury following the Transferincreased net interest income by around £115m; and

• a gain on the sale of the retail deposit business to Abbey, net of the costs associated with the Transfer, of £216.3m.

In addition, the recognition of the impact of lengthening average lives of mortgages on the balance sheet in the Group’s effective interestrate methodology increased net interest income by £196.0m. Rapidly declining fourth quarter market interest rates caused the fair valueof derivatives used to manage balance sheet interest rate risk to rise contributing to full year fair value gains of £183.0m.

PerformanceNet operating income was 55% higher in the year at £886.7m (2007: £572.3m). The major reasons for this were net interest income, 35%higher at £737.4m (2007: £547.7m) and fair value gains of £183.0m (2007: £49.7m loss). Ongoing administrative expenses fell £27.0mor 10% to £253.2m (2007: £280.2m) while loan impairment rose £485.2m to £507.7m (2007: £22.5m) and investment impairmentincreased to £191.6m (2007: £94.4m). Other major items include the gain on sale of the retail deposit business of £216.3m and costsassociated with restructuring and contract termination of £43.7m.

The tax charge was £116.1m (2007: £32.8m), being an effective rate of 86.4% (2007: 26.0%). Statutory profit after tax was £75.0m lowerat £18.2m (2007: £93.2m).

Net interest incomeNet interest income was 35% higher at £737.4m (2007: £547.7m). Interest-bearing assets were broadly similar at £50.4bn (2007:£49.7bn), however the average level of interest-bearing liabilities fell to £43.6bn (2007: £47.9bn) due to the sale of the retail depositbusiness.

Income StatementFor the year ended 31 December 2008 2007

£m £m

Net interest income 737.4 547.7Fee and commission income 63.3 81.7Realised gains less losses on financial instruments (120.3) 6.5Fair value movements 183.0 (49.7)Hedge ineffectiveness 18.5 (23.5)Other operating income 4.8 9.6Net operating income 886.7 572.3Administrative expenses:

- Ongoing (253.2) (280.2)- Other net expenses (23.7) -

Loan impairment loss (507.7) (22.5)Investment impairment loss (191.6) (94.4)Gain/(loss) on sale of assets and liabilities 216.3 (58.0)Non-operating income 7.5 8.8Profit before taxation 134.3 126.0Taxation (116.1) (32.8)Profit for the financial year 18.2 93.2


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Directors’ reportFinancial review continued

The yield of interest-earning assets rose to 6.19% (2007: 5.96%) reflecting the rise in interest charged on mortgages written in 2007 (alarge proportion of which were fixed rate) which had a full year impact in 2008. Assumptions regarding the recognition of mortgageincome are reviewed on a regular basis. During the course of 2008 the rate of mortgage redemptions has slowed significantly to 10.6%from 18.5% in 2007. As a consequence, the amount of income expected to be earned over the life of the mortgage book has increased,as has the average yield on those loans. In respect of this, a one-off addition to income of £196.0m has been recognised in 2008. This isreflected in the rise in the full year interest margin to 1.46% (2007:1.10%).

In the nine months to the end of September, average funding costs rose as the Group accessed increasingly expensive retail deposits andsecured funding facilities. This was reflected in the average interest rate of interest-bearing liabilities rising to 5.61% (2007: 5.05%).

From October, average total funding costs fell due to the interest-free Statutory Debt of £18.4bn which replaced the retail deposit balancessold to Abbey. This was in part offset by the costs associated with guarantees provided by HM Treasury on unsecured wholesale depositsand covered bonds. In total, the contribution of interest-free liabilities increased Group net interest margin by 0.88% (2007: 0.19%).

Net interest incomeFor the year ended 31 December 2008 2007

£m £m

Net interest income 737.4 547.7Average balancesInterest-earning assets (‘IEA’) 50,433 49,743 Financed by:Interest-bearing liabilities 43,603 47,904Interest-free liabilities 6,830 1,839

% %

Average ratesGross yield on average IEA 6.19 5.96Cost of interest-bearing liabilities (5.61) (5.05)Interest spread 0.58 0.91Interest-free liabilities 0.88 0.19Net interest margin on average IEA 1.46 1.10Average bank base rate 4.68 5.51Average 3 month LIBOR 5.51 6.00Average 3 year swap rate 5.03 5.81

Non-interest operating incomeFor the year ended 31 December 2008 2007

£m £m

Lending-related 18.7 28.7Investment 18.9 30.8General insurance 18.7 19.9Other 7.0 2.3Total fee and commission income 63.3 81.7Realised gains less losses on financial instruments (120.3) 6.5Fair value movements 183.0 (49.7)Hedge ineffectiveness 18.5 (23.5)Other operating income 4.8 9.6Total non-interest operating income 149.3 24.6

Fee and commission income Fee and commission income fell 23% to £63.3m (2007: £81.7m).

Mortgage origination volumes fell significantly in 2008, resulting in lower mortgage related income of £18.7m (2007: £28.7m). Thisreflected lower mortgage redemption rates and the reduction in administration fees.

The difficult trading conditions of late 2007 continued and this, together with the cessation of our relationship with Legal & General onsale of the branch network, caused investment product commission income to fall to £18.9m (2007: £30.8m). Income from generalinsurance fell to £18.7m (2007: £19.9m).

Other fee and commission income includes a fee charged for the provision of transitional services by Bradford & Bingley to Abbey.

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Realised gains less losses on financial instrumentsThroughout the year conditions in the wholesale credit markets deteriorated, particularly in the second half. Market prices for theinvestment portfolio declined as the outlook worsened. It was announced in September 2008 that we had sold or written down to zero allof the CDOs, CLOs and SIVs of which amounted to £520.1m at 31 December 2007. The loss on sale of these assets was £120.3m (2007:£6.5m gain).

Fair value movementsThe transfer of the retail deposit business created balance sheet interest rate risk. Approximately £7bn of interest rate swap contractswere entered into in the final quarter of 2008 to bring our interest rate risk within acceptable limits. Although these contracts hedge theoverall balance sheet risk, they do not meet the accounting definition of a hedge relationship and so movements in the fair value of thesehedges are reflected directly in the income statement. Similarly, after the transfer of the retail deposit business c. £8bn of interest rateswaps were retained that previously hedged the interest rate risk of fixed rate savings bonds. These swaps no longer satisfy the criteriafor hedge accounting and so the change in their fair value is also reflected in the income statement. These contracts, together with largereductions in interest rates, resulted in a full year gain of £183.0m (June 2008: £63.0m loss, 2007: £49.7m loss).

Hedge ineffectiveness reflects the accounting adjustment for fair value differences between derivatives in an accounting hedgerelationship and the items being hedged. This was a gain of £18.5m (2007: £23.5m loss).

Other operating incomeOther operating income was 50% lower at £4.8m (2007: £9.6m) as a result of a lower number of sales of the Group’s properties prior tothe Transfer than in 2007.

Administrative expensesOngoing administrative expenses were lower at £253.2m (2007: £280.2m). The ratio of costs to assets improved from 0.56% to 0.50%.

Staff-related costs fell from £121.0m in 2007 to £104.0m reflecting the reduction in staff numbers subsequent to the sale of the savingsbusiness. The average number of full time equivalent staff was 2,420 in 2008, down from 2,862 in 2007. At the year end there were 942full time equivalent staff. Premises costs were similarly lower at £18.2m (2007: £20.5m) reflecting the sale of the branch network on theTransfer. Marketing campaigns prior to the sale of the retail deposit business resulted in costs of £18.5m (2007: £19.7m). A reduction ininfrastructure investment during the year led to a reduction in the depreciation charge to £19.3m (2007: £23.7m).

In 2006, £89.4m was provided in respect of compensation costs for the mis-selling of endowment policies and investment products. Thelevel of outstanding claims was reviewed and £20.0m of this provision was not required. The remaining provision is £25.5m. Costs wereincurred in relation to the closure of the Borehamwood mortgage processing centre and in terminating mortgage acquisition contracts.These totalled £43.7m (2007: £nil).

Administrative expensesFor the year ended 31 December 2008 2007

£m £m

Staff-related 104.4 121.0Premises 18.2 20.5Marketing 18.5 19.7Other administrative expenses 93.2 95.3Depreciation and amortisation 19.3 23.7Ongoing administrative expenses 253.2 280.2Restructuring costs 11.7 - Contract termination fees 32.0 -Compensation provision release (20.0) -Other net expenses 23.7 -Total 276.9 280.2Ratio of ongoing costs to assets 0.50 0.56


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Arrears and possessions2008 2007

Arrears over 3 months- number of cases 16,712 5,610 - % of total cases 4.43 1.48 - value of cases in arrears (£m) 2,404.0 731.2 - % of book 5.87 1.85

Possessions- number of cases 643 560 - % of total cases 0.17 0.15 - value (£m) 110.1 97.0 - % of book 0.27 0.25

Total- number of cases 17,355 6,170 - % of total cases 4.60 1.63- value (£m) 2,514.1 828.2 - % of book 6.14 2.10 - value of arrears and possessions (£m) 112.5 49.0- % of total book 0.27 0.12

Residential loan impairment allowanceImpairment allowance (£m) 467.7 54.8

- % of residential assets 1.13 0.14 - % of arrears and possessions 18.60 6.62

Investment impairmentThroughout the year, global economic conditions worsened impacting the structured finance investment portfolio. Regular reviews ofimpairment resulted in an impairment charge for investment assets of £191.6m (2007: £94.4m). As mentioned above, CDO, CLO and SIVinvestments have now been sold or are held at zero value. A structured finance portfolio of principal protected notes and credit fundsvalued at £472.2m is retained.

Gain resulting from the sale of assets and liabilities under the TransferUnder the Transfer, retail deposit balances, branch network and our investment in Bradford & Bingley International Ltd, the Isle of Mandeposit taker, were sold to Abbey. The consideration for these assets was £612.0m which, after deducting the carrying value of assetssold and associated charges, resulted in a gain of £216.3m. In 2007, a loss of £58.0m was incurred on the sale of £4.0bn of commercialproperty and housing association loans.

Non-operating incomeAs in 2007, a number of branches were transferred under sale and leaseback arrangements prior to the Transfer. These generated a netgain of £7.5m (2007: £8.8m).

Arrears and loan impairmentArrears levels increased markedly in 2008. The total number of cases three months or more in arrears or in possession has increased to17,355 (2007: 6,170) which equates to 4.60% of the book (2007: 1.63%). The total value of the Group’s arrears and possessions is now0.27% of mortgage balances (2007: 0.12%).

The provision for residential loan impairment of £467.7m (2007: £54.8m) depends mainly on arrears levels. However, it also includes£173.9m of provision for suspected fraud cases (2007: £14.5m). The other main factors taken into account in calculating the provision arethe likelihood of taking a property into possession and any possible subsequent loss on sale. That possible loss is assessed fully, takinginto account expectations for future house price deflation which contributed £70.2m to the impairment charge. During the year, 1,503properties were repossessed, of which 1,012 were owner occupied and 491 were buy-to-let. Actual losses on properties sold followingrepossession were £65.5m (2007: £23.8m).

As a proportion of balances, the residential impairment provision was 1.13% (2007: 0.14%) and the charge to the income statement was£477.1m (2007: £24.0m).

The charge for impairment of the commercial loan book was £30.7m (2007: £0.1m) reflecting the deteriorating economic conditions.

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TaxationThe total charge for tax for the year was £116.1m (2007: £32.8m). Given the profit before taxation of £134.3m (2007: £126.0m) thisequates to an effective tax rate of 86.4% (2007: 26.0%), caused primarily by deferred tax assets being written off (see note 6 to the financialstatements). The effective tax rate has also increased because the charge for tax prudently allows for the possibility that HM Revenue &Customs (‘HMRC’) may view the Transfer as a ‘cessation of trade’ for tax purposes. The consequence of such a view would be that taxlosses accumulated to the date of the Transfer would not be available to relieve tax on future profits. Whether there has been a ‘cessationof trade’ for tax purposes will continue to be discussed with HM Treasury and HMRC.

AssetsLending balances grew by 3% during the year to £41.8bn (2007: £40.4bn; June 2008: £42.2bn), with a smaller decline than expected inthe second half due to the sharp fall in residential mortgage redemption rates. The growth in balance sheet size was mainly due to theincrease in value of derivative financial instruments to £6.0bn (2007: £1.2bn). This mainly reflects the impact of the weakening of sterlingon the cross-currency interest rate swaps that hedge the Group’s foreign currency wholesale borrowings .

Wholesale assets fell to £7.5bn (2007: £9.6bn) reflecting sales and write-downs of the investment book and the lower liquidity requiredfollowing the establishment of a Working Capital Facility with HM Treasury.

LiabilitiesFollowing the Transfer, retail deposits fell to £nil (2007: £21.0bn). The Statutory Debt amounts to £18.4bn.

Wholesale funding increased to £30.8bn (2007: £27.8bn) reflecting the impact of weaker sterling on foreign currency wholesaleborrowings and additional secured funding which together outweighed maturing wholesale debt.

Balance Sheet summaryAt 31 December 2008 2007

£m £m

Loans and advances to customers:- Residential mortgages 40,967.3 39,422.3- Commercial and other secured loans 858.7 1,022.2

Wholesale assets 7,474.3 9,565.0Fair value adjustments on portfolio hedging 561.3 (53.8)Derivative financial instruments 6,022.9 1,175.4Fixed and other assets 38.1 853.5Total assets 55,922.6 51,984.6Retail deposits - 20,988.0Statutory Debt 18,413.9 -HM Treasury Working Capital Facility 2,275.7 -Wholesale funding 30,812.9 27,547.1Fair value adjustments on portfolio hedging - (5.9)Derivative financial instruments 1,230.2 498.6Other liabilities 414.7 330.7Interest-bearing capital 1,617.1 1,415.3Equity 1,158.1 1,210.8Total liabilities and equity 55,922.6 51,984.6


B21448 R&A 2008 FRONT 1/4/09 09:43 Page 12



Capital structure2008 2007

£m £m

Share capital and reserves 1,158.1 1,210.8Available-for-sale reserve adjustment 348.1 61.9Cash flow hedge reserve adjustment 148.5 60.4Intangible assets adjustment - (41.0)Net pension deficit (10.0) (4.0)Innovative tier 1 149.0 148.8Total tier 1 capital 1,793.7 1,436.9Upper tier 2 capital 584.6 580.1Lower tier 2 capital 676.0 647.0Total tier 2 capital 1,260.6 1,227.1Deductions (55.7) (146.7)Total capital 2,998.6 2,517.3Risk-weighted assets 20,156 16,655Total tier 1 ratio (%) 8.9 8.6Total capital ratio (%) 14.9 15.1

Neither the available-for-sale reserve nor the cash flow hedge reserve are deducted when calculating capital ratios. The tier 1 ratio of8.9% and the total capital ratio of 14.9% mean that Bradford & Bingley remains one of the better capitalised UK banks.

The Group continues to operate under the standardised regime of Basel II.

CapitalA rights issue, which was approved on 17 July and completed on 26 August, increased shareholder’s equity by £401m. This increase,together with the retained profit for the year of £18.2m, was offset by movements in other reserves such that total equity fell by £52.7m.

As a result of the deteriorating market for wholesale credit products through the year, the fair value of mortgage backed and other debtsecurities reduced and this was reflected in a £286.2m adverse movement of the available-for-sale reserve to a £348.1m debit balanceafter tax (2007: £61.9m debit).

The cash flow hedge reserve (which records fair value changes in interest rate derivatives deemed to be in cash flow hedge relationships)declined by £88.1m to £148.5m debit after tax (2007: £60.4m debit).

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Directors’ reportOur Board

Richard Pym (BSc, FCA) Executive Chairman Richard (age 59) joined the Board as Chief Executive in August 2008 and was appointed Executive Chairman in November 2008. He isalso Chairman of the Nominations Committee. Richard is a Non-executive Director of Old Mutual plc and Non-executive Chairman ofBrightHouse Group Ltd. He was Group Chief Executive of Alliance & Leicester plc until July 2007, and prior to that he held a number offinancial and general management roles at The Burton Group plc, BAT Industries plc, British Gas and Thomson McLintock & Co. Formerly aVice President of the British Bankers Association, a Non-executive Director of Selfridges plc, and Chairman of Halfords Group plc, Richardis a Fellow of the Institute of Chartered Accountants in England and Wales and a physics graduate of the University of Warwick.

Louise Patten (MA (Oxon))Non-executive DirectorLouise (age 55) joined the Board in December 2003. She is Chairman of the Remuneration Committee and a member of the AuditCommittee and Nominations Committee. Louise is Non-executive Chairman of Brixton plc and a Non-executive Director of Marks andSpencer Group plc as well as senior adviser to Bain & Company. She began her career at Citibank and remained in financial services until1993 when she joined the management consultancy, Bain & Company, as a partner. Her previous experience as a Non-executiveDirector includes the Hilton Group, Great Universal Stores and Somerfield.

Chris Willford (BA, ACMA)Group Finance DirectorChris (age 46) joined the Board as Group Finance Director in October 2005. He is responsible for the Finance, Compliance, Risk, Audit andTreasury functions. He previously held senior finance roles at Abbey National plc, Barclays Bank PLC, British Airways and Unilever PLC andis a chartered management accountant. During 2008, Chris was appointed as a Non-executive Director of the Personal Accounts DeliveryAuthority.

Roger Hattam (BA, MBA)Group Operations DirectorRoger (age 40) joined the Board in May 2007 and is currently Group Operations Director with responsibility for mortgage administration,credit collection and the customer contact centre. Roger has worked for the Company for 18 years in a number of senior roles, includingcredit management, strategy, product development and sales.

Michael Buckley (MA, LPh, MSI, FCIB(RoI))Non-executive DirectorMichael (age 64) joined the Board in July 2007. He is Chairman of the Audit Committee and a member of the Remuneration Committeeand the Nominations Committee. Michael is Non-executive Chairman of DCC plc and a Non-executive Director of both M&T Corporationin the USA and Bramdean Alternatives Limited. He is also a senior adviser to a number of privately held Irish and international companiesand is an Adjunct Professor at the Department of Economics at NUI University College, Cork. He was Group Chief Executive of Allied IrishBanks plc from 2001 to 2005 having earlier served as Managing Director of AIB Capital Markets and AIB Poland. Previously, he wasManaging Director of the NCB Group and a senior public servant in Ireland and the EU.

Directors Details of Board appointments and retirements during 2008 are shown below:

Nicholas Cosh was the Senior Independent Director until his resignation on 14 November 2008 and also Deputy Chairman from 1 June2008 until his resignation on 14 November 2008.

Robert Dickie Resigned 21 April 2008

Steven Crawshaw Retired 31 May 2008

Richard Pym Appointed 18 August 2008

Mark Stevens Resigned 4 September 2008

Nicholas Cosh Resigned 14 November 2008

Ian Cheshire Resigned 14 November 2008

Rod Kent Resigned 14 November 2008

Stephen Webster Resigned 14 November 2008

Rod Kent was Non-executive Chairmanuntil 31 May 2008 and ExecutiveChairman between 1 June 2008 and 17August 2008. Thereafter, he was Non-executive Chairman until his resignationon 14 November 2008.

Richard Pym was appointed as Director andChief Executive on 18 August 2008 andExecutive Chairman on 14 November 2008.


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Directors’ reportOur Board continued

Number of meetings held

Rod Kent (Resigned 14 November 2008)Richard Pym (Appointed 18 August 2008)Steven Crawshaw(Retired 31 May 2008)Nicholas Cosh(Resigned 14 November 2008)Stephen Webster(Resigned 14 November 2008)Ian Cheshire(Resigned 14 November 2008)Robert Dickie(Resigned 21 April 2008)Louise PattenChris WillfordRoger HattamMark Stevens(Resigned 4 September 2008)Michael Buckley

Board

3

27/34

10/10

12/13

27/34

20/34

19/34

6/8

25/3633/3626/3619/30

27/36

AuditCommittee

6

5/5

5/5

4/5

1/1

6/6

RemunerationCommittee

4

2/2

1/3

1/3

4/4

1/1

NominationsCommittee

2

2/2

1/2

2/2

0/2

2/2

2/2

Balance SheetManagement

Committee

3

2/3

3/3

2/33/3

Board and Committee MeetingsDuring 2008 there was an unusually high number of meetings. A significant number of those meetings dealt with the sign-off of wordingwithin documents or technical issues that had been discussed and agreed in principle at previous meetings. In such cases it was agreed priorto the meeting that only a restricted number of directors need attend. The number of meetings attended by each Director was as follows:

The Audit Committee was chaired by Stephen Webster until his resignation in November 2008 and thereafter by Michael Buckley. TheNominations Committee was chaired by Rod Kent until June 2008, after which date Nicholas Cosh became Chairman until his resignationin November 2008, with Richard Pym chairing the Committee thereafter. The Chairman of the Remuneration Committee throughout 2008was Louise Patten.

The Balance Sheet Management Committee met three times during the year before being discontinued in November 2008. TheCommittee monitored, reviewed and advised the Board on all balance sheet management matters, including funding programmes. All ofthe matters formerly considered by the Committee are now dealt with by the Board.

The members of the Balance Sheet Management Committee during 2008 were Nicholas Cosh (Chairman of the Committee), until hisresignation in November 2008, Rod Kent, until his resignation in November 2008, Chris Willford, Roger Hattam and the Director ofTreasury and Wholesale Banking (a senior executive).

The current membership of the committees is set out on pages

17-18�

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Directors’ reportCorporate governance IntroductionFollowing the Transfer, Bradford & Bingley’s shares were delisted on 29 September 2008 and transferred to the Treasury Solicitor asnominee for HM Treasury. As a consequence, the full requirements of the UKLA’s Listing Rules and the Combined Code on CorporateGovernance no longer apply to the Company. However, the Company intends to operate a corporate governance structure which, as faras practicable, takes appropriate account of best practice for a company listed on the Official List, including the Combined Code onCorporate Governance.

The details of the corporate governance arrangements set out below are those in force at the date of this report.

Governance structureSince the Transfer, the governance structure has been determined by a framework document (the ‘Framework Document’) agreedbetween the Company and its sole shareholder, HM Treasury. The Framework Document sets out how the relationship between theCompany and the Shareholder will work in practice and may be revised from time to time by HM Treasury as circumstances change.

The Framework Document is underpinned by the overall aims of the tripartite authorities (comprising HM Treasury, the Bank of Englandand the FSA), which are to protect taxpayers, to promote financial stability and to protect consumers. It requires that the Company deliversa funding and strategy plan to define the objectives of the shareholder and those of the Tripartite authorities (the ‘Business Plan’).

The principles of the Framework DocumentThe relationship between the Company and the Shareholder operates according to the following principles, under which the Shareholder:

• has the right to appoint the Chairman of the Board and may appoint one or more non-executive directors; • must give its consent for the appointment of other members of the Board proposed to be appointed by the Board’s Nominations

Committee and agrees the terms on which the directors are appointed and incentivised; • determines the high level objectives that the Business Plan is designed to achieve and agrees the Business Plan with the Board; • must agree any subsequent updates to the Business Plan; • reviews with the Board, from time to time, the Company’s strategic options; • requires that the Board is accountable to it for delivering the agreed Business Plan; • gives the Board the normal commercial freedom to take the action necessary to deliver the Business Plan; • monitors the Company’s performance to satisfy itself that the Business Plan is on track; and • must give its consent for certain significant actions.

Implementation of the principlesBoard structure and governance The Board will continue to operate the following committees:

• Audit Committee• Remuneration Committee• Nominations Committee

Board appointments and compositionThe Shareholder considers that the composition of the Board is a critical factor and seeks to secure an environment in which theShareholder and the Chairman share a common view about Board composition (including size and balance of experience andbackground) and succession. To achieve this:

• the Chairman and either the Chancellor of the Exchequer or a senior official nominated by the Chancellor of the Exchequer (the‘Nominated Official’) will discuss and confirm Board composition and succession initially, and regularly thereafter, in the light ofperformance and the requirements of the Business Plan;

• one or more non-executive directors nominated by the Shareholder (the ‘Shareholder Directors’) may be appointed to the Board. TheCompany acknowledges that the Shareholder Directors, if appointed, intend to liaise with and report to representatives of theShareholder from time to time in relation to the business of the Company and decisions made or to be made by the Board in orderto assist with the exercise of their powers and duties as directors of the Company;

• one or more senior representatives of the Shareholder will attend meetings of the Board of the Company in an observer capacity; • the Chairman will discuss with the Nominated Official any impending changes to Board membership; • the Nominated Official will meet the Chairman of the Nominations Committee, as necessary, to discuss any proposed Board

changes before they become subject to the formal appointment/consent procedure outlined above; and • the Board will ensure that suitably rigorous appraisals are made of the effectiveness of the Chairman and Board.


Further details about these Committees and their work are provided on pages

17-18�

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Directors’ reportCorporate governance continued

Board responsibilitiesThe Board is responsible for:

• developing and recommending the Company’s strategic and funding plan (the ‘Business Plan’) to deliver the objectives of theShareholder and those of the tripartite authorities; and

• delivering the Business Plan in accordance with the requirements of the Framework Document. In this respect, decisions on the day-to-dayrunning of the Company, subject to the Framework Document and the Company’s Memorandum and Articles of Association, rest with theBoard in accordance with the Directors’ statutory, common law and fiduciary responsibilities. The Shareholder is committed to giving the Boardthe commercial freedom necessary to deliver the agreed Business Plan and will not interfere in day-to-day operational and commercialmatters.

Monitoring performance The Shareholder will regularly monitor the Company’s performance against the Business Plan by means of the following main mechanisms:

• regular meetings between the Company and the Shareholder to consider progress against the Business Plan; and• regular financial and business performance monitoring to track the achievement of the Business Plan and the Company’s

performance against agreed objectives, on a timely, regular and appropriate basis.

In addition, the Shareholder has certain monitoring and information access rights, and its approval must be obtained for certain materialtransactions.

Board CommitteesIn accordance with the Framework Document, the Board will continue to operate a number of Committees, each of which has detailed termsof reference setting out its remit and authority. Details of the membership and roles of each Committee are set out below.

Audit CommitteeThe Audit Committee currently comprises Michael Buckley (Chairman) and Louise Patten, both of whom are independent non-executivedirectors. The Committee met six times in 2008.

The Committee monitors, reviews and advises the Board on: • all significant matters relating to the Group’s risk strategy and policies;• the effectiveness of the Group’s risk management processes and its financial and other internal control systems;• the integrity of the financial statements and external reporting responsibilities;• the Group’s principal accounting policies; and• the results of the external audit and any significant matters identified.

The Committee approves the terms of reference for the Internal Audit, Risk and Compliance functions, and reviews the adequacy andeffectiveness of the activities carried out by those functions. In addition, the Committee reviews the effectiveness of the system of internalcontrol annually in accordance with the Combined Code on Corporate Governance.

The Audit Committee is responsible for recommending the appointment, re-appointment and removal of the external auditors. It reviews thescope and results of the annual external audit, its cost-effectiveness and the independence and objectivity of the external auditors. TheCommittee also reviews the nature and extent of non-audit services provided by the external auditor to ensure that these do not impair theauditor’s independence or objectivity.

The external auditors may attend all meetings of the Committee and they have direct access to the Committee and its Chairman at all times.The Committee regularly receives reports of reviews conducted throughout the Company by the Internal Audit function.

In 2008, the Committee reviewed the effectiveness of the external auditors and made a recommendation that they be re-appointed for afurther 12 months. The Board accepted this recommendation and an appropriate resolution was passed at the 2008 Annual General Meeting.

Remuneration CommitteeThe Remuneration Committee currently comprises Louise Patten (Chairman) and Michael Buckley, both of whom are independent non-executive directors. The Committee met four times in 2008.

Subject to compliance with the requirements of the Framework Document, the Committee is responsible for advising the Board on theremuneration arrangements for the Chairman and the Executive Directors. The Committee also reviews and recommends to the Board theremuneration arrangements for those executives directly below Board level and the remuneration policies for all other staff.

The Committee takes internal and external professional advice where necessary to discharge its obligations.

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Directors’ reportCorporate governance continued

Nominations CommitteeThe Nominations Committee currently comprises Richard Pym (Chairman), Michael Buckley and Louise Patten. Michael Buckley and Louise Patten areboth independent non-executive directors. The Committee met twice in 2008.

Subject to compliance with the requirements of the Framework Document, the Committee is responsible for reviewing the composition of the Boardand preparing succession plans. The Committee is also responsible for identifying potential executive and non-executive directors, and makingrecommendations to the Board concerning the appointment or re-appointment of directors, having regard to the requirement for the Board to havethe appropriate range of skills and experience.

The Committee also reviews succession and management development plans for key executive roles.

Shareholder relationsFollowing the Transfer, all of the shares in the Company are held by the Treasury Solicitor as nominee for the Shareholder. The relationship with thesole shareholder is principally determined by the Framework Document agreed between the Company and the Shareholder. The FrameworkDocument sets out the structure of how the shareholder relationship between the Company and HM Treasury will work in practice.

Internal control The Board is responsible for the Group’s system of internal control and seeks regular assurance to satisfy itself that the system is functioningeffectively in managing risks in the manner which it has approved. Such a system can only provide reasonable, and not absolute, assurance againstmaterial misstatement or loss, as it is designed to manage, rather than eliminate, the risk of failure to achieve business objectives.

Throughout the year ended 31 December 2008, the Group has operated a system of internal control, which includes an ongoing risk managementprocess for identifying, evaluating and managing the significant risks faced by the Group. During the year, the Board has continued to review theeffectiveness of the Group’s system of financial and non-financial controls including, operational and compliance controls, risk management, and theGroup’s most significant risks and mitigating actions.

In addition, as part of the process of preparing this statement, the Board has also performed its annual assessment of the effectiveness of internalcontrols. In particular, it has considered the events that gave rise to the Transfer. The Board is not aware of any significant failures in internal controlthat arose in the business of the Group during 2008 that are not being addressed in accordance with the internal control procedures of the Group.Management regularly takes action to improve internal controls, either as a result of its own initiative or in response to reports from internal audit andother oversight review functions.

Changes in financial regulation continue within the industry. The Group’s risk management processes are kept under regular review to ensure thatthe Group responds appropriately both to actual and proposed regulatory changes.

The Group operates a risk management process, producing a Group-wide risk profile. This identifies the Group’s significant risks, the probability ofthose risks occurring and their impact should they occur, and has the prime responsibility for the design and operation of suitable controls andmitigating actions. The risk management process is complemented by a formalised reporting and escalation process for control issues. Internal audithas a key role in maintaining the control environment by providing independent assurance on the effectiveness of the Group’s internal controlsystems. The Group Risk Committee oversees the risk management process, regularly considers the Group-wide risk profile, and receives monitoringreports to update it on progress.

The Group is committed to developing and maintaining an appropriate risk management framework and culture with the aim of continuing toensure that management understands the key risks that the business faces. This is achieved through an organisational structure with clear reportinglines and governed by appropriate business monitoring mechanisms, codes of conduct and policy statements.

The system of internal control has been in place throughout 2008 and up to the date of approval of the Annual Report & Accounts. In reviewing theeffectiveness of this system, the Board takes into account the work of the Audit Committee which receives reports from the Group Risk Committee onthe Group’s significant risks and how these are being managed. The Board also considers reports from internal audit, external audit, compliance andmanagement on the system of internal control, adherence to regulatory requirements and material control weaknesses, if any, together with actionstaken to address them. The Chairman of the Audit Committee reports on the outcome of each meeting to the Board, where appropriate, and theBoard also receives minutes of these Committee meetings.

Going concernAs set out in note1 to the financial statements, HM Treasury have provided various on-demand facilities to the Company and provided comfort to thedirectors in relation to the Company’s future financing requirements. These facilities are subject to clearance being obtained from the EuropeanCommission. If such clearance is not obtained then the facilities may be withdrawn. Subject to this material uncertainty pertaining to the Company’sfunding requirements, the directors are satisfied at the time of approval of the financial statements that the Group and the Company have adequateresources to continue in business for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing thefinancial statements.


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Directors’ reportRisk management and control IntroductionIn accordance with the requirements in the Framework Document referred to on pages 16 to 18, Bradford & Bingley’s approach to riskmanagement is built on formal governance processes and relies on individual responsibility and collective oversight, informed bycomprehensive reporting. The following sections describe the approach to risk management. The first section covers the Group’s riskgovernance structure. The second section explains the way in which the Group identifies, categorises and manages the risks it faces.

Other factors could also affect the Group’s results, including economic factors. Therefore, the risks described below should not beconsidered to represent all of the potential risks and uncertainties which could impact the Group.

Risk governanceThe responsibility for the overall framework of risk governance and management lies with the Board. The Board is responsible fordetermining risk strategy, setting the Group’s risk appetite and ensuring that risk is monitored and controlled effectively. It is alsoresponsible for establishing a clearly defined risk management structure with distinct roles and responsibilities. Within that structure, linemanagers are responsible for the identification, measurement and management of the risks within their areas of responsibility.

The Residential Lending Credit Risk function acts as the credit risk control unit with responsibility for the Group’s residential lending creditrisk and rating system. Independent challenge and validation is provided by the Group Risk function. The Treasury Finance teams, whichreport into the Group Finance Director, are responsible for identification, measurement and monitoring of wholesale credit risk, marketrisk and liquidity risk. Independent monitoring of the risk management framework is provided by risk management specialists based inthe Risk, Audit and Compliance functions.

In addition to individual responsibilities for risk management, there is a structure of committees that, under authority delegated by theBoard, have formal responsibility for defined aspects of risk management. The roles and responsibilities of the risk managementcommittees are set out in the following paragraphs.

Audit CommitteeThe Audit Committee is a non-executive committee that supports the Board in carrying out its responsibilities for financial reporting,including accounting policies, internal control and risk assessment. The Audit Committee monitors the ongoing process of theidentification, evaluation and management of all significant risks throughout the Group.

Executive Committee (‘EXCO’)EXCO is an advisory committee to support the Executive Chairman in managing the Group’s business. EXCO consists of the ExecutiveBoard Directors, the HR Director and the Commercial Director.

Group Risk Committee (‘GRC’)GRC is a sub-committee of EXCO and ensures that the Group’s overall risk management framework is effective and that key risks aremanaged cost-effectively and to an acceptable level.

Asset & Liability Management Committee (‘ALCO’)ALCO is an advisory committee which supports and advises EXCO on asset and liability management (including interest rate riskmanagement), related wholesale credit and capital risks and issues.

Credit Risk Committee (‘CRC’)CRC is a sub-committee of GRC. It supports and advises GRC in the effective execution of its obligations in respect of residential andcommercial lending credit risks.

Group RiskThe Group Risk function comprises Operational Risk and Financial Risk and its role is to:

• develop a Group strategy, policy and framework for risk management, aligned with business requirements;• provide support to the Group in the implementation of the framework;• bring together analyses of risk concentrations and sensitivities across the Group;• act as a point of reference for risk and control matters, providing advice to management, sharing best practice and carrying out

special reviews as directed by GRC and ALCO; and• provide independent assessment of, and challenge to, the business areas’ risk management and profiles to ensure that they are

maintained in a robust manner.

Pages 19 to 22 forman integral part of thefinancial statements

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Directors’ reportRisk management and control continued

ComplianceThe role of Compliance is to:

• provide a focal point to co-ordinate communications and consultations with regulatory authorities; • oversee the compliance performance of the Group;• to keep line management, GRC, the Audit Committee and the Board informed of the state of compliance measured against

objective and published performance standards and indicators;• draw attention to areas of under-performance and improving or worsening trends; and • provide rapid alert to particular risks or failings.

Internal auditErnst & Young have been contracted to provide internal audit services. However, the management of the Internal Audit function remainsfirmly with Bradford & Bingley. The role of Internal Audit is to provide independent and objective assurance that the process for identifying,evaluating and managing significant risks faced by the Group is appropriate and effectively applied.

Risk categorisationThe Group categorises risk under the following headings:

Credit risk Credit risk is the potential financial loss caused by a retail customer or wholesale counterparty failing to meet their obligations to theGroup as they become due. This covers all exposures and includes credit risk on guarantees and irrevocable undrawn facilities.

Risks arising from changes in credit quality remain a central feature of the Group’s business and the recoverability of loans and amountsdue from counterparties are inherent across most of the Group’s activities. Adverse changes in the credit quality of borrowers or a generaldeterioration in UK economic conditions could affect the recoverability and value of the Group’s assets and therefore its financialperformance. As credit risk is the main risk to the Group, a credit risk framework has been established as part of the overall governanceframework to measure, mitigate and manage credit risk within the Group’s risk appetite. To a lesser degree, the Group is exposed toother forms of credit risk, such as those arising from settlement activities where the risk is a consequence of undertaking the activity,rather than a driver for it.

The Group’s credit risk framework is based on the allocation of the Group’s lending into risk categories. These provide a sufficient level ofdetail to identify, monitor and manage the overall credit risk profile on a monthly basis. These categories are defined in relation to profitability.

In 2008, the categories were defined as follows:

The assignment of the loans to the different risk categories is based on an assessment of the relative risk of default and the strength ofthe underlying security (all retail customer lending being secured) in a severe recession. The resulting risk profile is then projected forward.For 2008, Board-approved limits were then structured in line with the Group’s risk appetite. As the Group is closed to new business in2009, the Group’s ability to influence the structure of its balance sheet, and hence alter its risk profile, is restricted to the degree of controlwhich it has over loan redemptions and credit collections activity. Control is exercised by monitoring that the risk profile remains withinexpected bounds.

Within the Group’s Treasury banking book, minimum long-term or short-term credit limits have been set for all counterparties.

The Group also holds a structured finance portfolio that primarily consists of investments in asset-backed securities (‘ABS’). The credit riskis driven by the quality of the underlying securitised assets which, in turn, drives the demand for, and therefore marketability of, the issues.To limit credit risk and concentrations, overall investment in structured investments is capped with separate limits set for the ABS portfolioand other products.

The limits on the amount of the investments portfolio, and the individual types of assets within it, were reduced for 2008 as part of theGroup’s approach to managing risk. No new investments were made in 2008.



medium risk: in the event of a markedly adverse economy, high levels of bad debts would result in profits being negligible or losses being incurred;

medium/low risk: a markedly adverse economy would cause substantial reductions in profitability, but profits would still be positive; low risk: only modest reductions in profitability would be recorded even in the event of a markedly adverse economy; and negligible risk: these are loans which have low risk of default and, more importantly, such high levels of security that, even in

a markedly adverse environment, it would not be expected that any bad debt loss would be incurred.

B21448 R&A 2008 FRONT 23/3/09 13:33 Page 20



The Group is firmly committed to the management of credit risk in both its lending and wholesale money market activities. In its core lending activities,the Group employed credit scoring, underwriting and fraud detection techniques that supported credit decision making and worked to minimiselosses. As no new lending is now being undertaken, the focus is on:

• a proactive approach to the identification and control of loan impairment in the Residential Lending Credit Risk and Credit Control areas; • fraud investigation; and • the use of credit scoring and other techniques to monitor the risk profile of the existing book. The Group Financial Risk Management function

provides challenge and oversight.

Lending policies and limits are reviewed and approved annually by the Board. The CRC ensures that any exposure to credit risk or significant changesin policy remain within overall risk exposure levels as agreed by the Board. Authorised credit risk limits for wholesale money market counterpartiesreflect the size, depth and quality of a counterparty’s capital base and, where published, credit ratings assigned by the major credit rating agencies. Inaddition to the credit risk governance framework outlined above, the Group takes security for mortgage funds advanced and, whilst these areconcentrated in the UK, manages the diversification of its portfolios through limits around individual counterparties and, for commercial lending, typesof counterparty, industry and geographic regions.

Market riskMarket risk is the potential adverse change in Group income or Group net worth arising from movements in interest rates, exchange rates or othermarket prices. Effective identification and management of market risk is essential for maintaining stable net interest income.

The most significant form of market risk to which the Group is exposed is interest rate risk. This typically arises from mismatches between therepricing dates of the interest-bearing assets and liabilities on the Group’s balance sheet, and from the investment profile of the Group’s capital andreserves. Group Treasury is responsible for managing this exposure within the risk exposure limits set out in the Balance Sheet Management policy,as approved by ALCO and the Board. This policy sets out the nature of the market risks that may be taken along with aggregate risk limits andstipulates the procedures, instruments and controls to be used in managing market risk.

It is ALCO’s responsibility to approve strategies for managing market risk exposures and ensure that Group Treasury implements the strategies sothat the exposures are managed within the Group’s approved policy limits.

The Group assesses its exposure to interest rate movements using a number of techniques. There are however, two principal methods:

i a static framework that considers the impact on the current balance sheet of an immediate movement of interest rates; andii a dynamic modelling framework that considers the projected change to both the balance sheet and mortgage product rates over the

following year under various interest rate scenarios.

The results of these analyses are presented to ALCO in order to identify, measure and manage the Group’s exposure to interest rate risk.

Under the provision of the Transfer, the interest rate characteristics of the balance sheet changed materially with savings balances replaced by loansfrom the FSCS and, as a result, revised risk limits were established.

Limits are placed on the sensitivity of the Group balance sheet to movements in interest rates. Exposures are reviewed as appropriate by seniormanagement and the Board with a frequency between daily and monthly, related to the granularity of the position. For example, the overall Groupbalance sheet interest rate risk exposure position is monitored monthly, whilst several specific portfolios within the balance sheet are reviewed morefrequently on a daily or weekly basis. This reflects the dynamics and materiality of the various portfolios.

Interest rate risk exposure is predominantly managed through the use of interest rate derivatives, principally interest rate swaps and interest ratefutures contracts. Interest rate swaps are over-the-counter arrangements with highly-rated banking counterparties, while futures contracts aretransacted through regulated Futures Exchanges. The Group also uses asset and liability positions to offset exposures naturally, wherever possible tominimise the costs and risks of arranging transactions external to the Group.

The Group established a limited trading book in January 2007 which was closed in October 2008. This was subject to a rigid risk limit framework thatwas reported daily. The framework included stop loss limits for daily (£0.5m), monthly (£1.0m) and annual (£2.0m) trading losses. Any breaches ofthese limits were reported to the Group Finance Director immediately and to ALCO and the GRC.

Foreign exchange riskAs the Group does not actively seek foreign exchange exposures, with the net exposure to foreign currencies relating primarily to net interest incomestreams denominated in the foreign currencies, the limit placed on this risk is small in relation to the Group’s other risk exposures. This exposure limit,and the small range of foreign currencies it is related to, is set out in the Balance Sheet Management policy that is approved by ALCO and the Board.The Group raises and invests funds in currencies other than sterling. Accordingly, foreign exchange risk arises from activities related to the Groupmanaging borrowing costs and investment returns. As with interest rate risk, Group Treasury is responsible for managing this exposure within thelimits set out in the Group’s policies.


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Foreign currency exposure is measured daily by Group Treasury taking into consideration all non-sterling assets and liabilities. Thisexposure position, broken down by individual foreign currency, is then circulated daily to senior managers with an overall summaryposition provided to ALCO on a monthly basis.

Funds raised in foreign currency are generally converted to sterling using currency swaps. Residual foreign exchange risk is managedthrough the use of foreign exchange contracts. It is also managed by matching foreign currency denominated assets with liabilitiesdenominated in the same foreign currency and vice versa.

Liquidity riskLiquidity risk management within the Group considers both the overall balance sheet structure and projected daily liquidity requirements,measuring the combined effect of asset and liability maturity mismatches across the Group and undrawn commitments and othercontingent obligations. The liquidity policy is approved by the Board and the day-to-day management of liquidity is the responsibility of theGroup Treasury function.

Following the Transfer, the Group’s liquidity risk is reduced. Consequently, the appropriate level of liquidity available at short-notice hasbeen reviewed and liquidity management now concentrates on forecasting the amount to be drawn under the Working Capital Facilityprovided by HM Treasury.

Operational riskOperational risk is the potential risk of financial loss or impairment to reputation resulting from inadequate or failed internal processesand systems, whether through the actions of people or from external events.

Major sources of operational risk include:

• outsourcing of operations;• dependence on key suppliers;• IT security;• internal and external fraud;• implementation of strategic change;• regulatory non-compliance (for example, mis-selling); and• process errors and external threats such as the loss of a critical site.

The Group’s business areas manage this risk through appropriate controls and loss mitigation actions, including insurance. These actionsinclude a balance of policies, appropriate procedures and internal controls to ensure compliance with laws and regulations. At a detailedlevel, risk and control assurance is facilitated by Group Risk, in conjunction with line managers, on the risks and control effectivenesswithin their areas of responsibility.

In addition, specialist support functions provide expertise in risk areas such as information security, health and safety, compliance, fraudmanagement, security and business continuity management.

A process is in place for the recognition, capture, assessment, analysis and reporting of risk events. This process is used to help identifywhere process and control requirements are needed to reduce the recurrence of risk events.

The Group has met the eligibility criteria for the adoption of the standardised approach to operational risk and assesses relevant incomefrom prescribed business lines such as Retail Banking, Retail Brokerage and Commercial Banking. For each business line, the Group’saverage annual published relevant income based on the last three years is calculated. Capital is held to support operational risk for eachbusiness line at prescribed rates from 12% to 18% of its average annual relevant income.



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Directors’ reportDirectors’ remuneration report On 25 November 2008, following the Transfer and subsequent changes to the composition of the Board, changes to the constitution andterms of reference of Board Committees, including the Remuneration Committee, were agreed by the Board. These changes are reflectedin this report.

This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (the ‘Regulations’, now containedin Schedule 7A to the Companies Act 1985) and the provisions of the Combined Code relating to directors’ remuneration. Although theBoard is no longer required to follow these provisions, it has sought to achieve standards equivalent to those attained by listed companiesin this regard.

The Remuneration Committee: 1 January 2008 - 25 November 2008The role of the Remuneration Committee in this period was to assist the Board in the development and application of remuneration policyfor the executive directors. The Remuneration Committee was composed entirely of independent non-executive directors, as detailed inthe table below. In addition, the Chief Executive and subsequently the Executive Chairman* were invited to attend RemunerationCommittee meetings for those items other than their own arrangements. The Group HR Director also provided advice to the Committee.

*The Non-executive Chairman, Rod Kent, became Executive Chairman on 1 June 2008 following the retirement of the Chief Executive, StevenCrawshaw, due to ill health.

The Remuneration Committee met three times between 1 January and 25 November 2008 and, amongst other items, considered:

• the remuneration package for the new Chief Executive;• the remuneration levels for executive directors;• the efficacy and competitiveness of the Group’s total reward package;• the structure of the executive pension arrangements and life assurance provision; and• the performance of the Remuneration Committee advisers, PricewaterhouseCoopers (‘PwC’) .

The Remuneration Committee: 25 November 2008 onwardsFollowing the Transfer, the purpose of the Remuneration Committee is four-fold:

i to recommend to the Board the remuneration arrangements for the Executive Chairman and the executive directors.ii to review the Executive Chairman’s proposals and recommend to the Board the remuneration of the next tier of management.iii to review the Executive Chairman’s proposals and recommend to the Board the remuneration policies (including any annual

increase) for the Group’s staff in general.iv to draft a remuneration report for the Board’s approval and inclusion in the Annual Report & Accounts.

‘Remuneration’ is taken as including basic salaries, all incentive schemes, pensions, all other employment benefits and contract terms.

Since 25 November 2008, the Remuneration Committee comprised two independent non-executive directors as follows:

• Louise Patten (Chairman)• Michael Buckley

The Remuneration Committee met once between 25 November and 31 December 2008. The terms of reference of the Remuneration Committee areavailable on www.bbg.co.uk

AdvisersPwC were appointed by the Remuneration Committee as independent advisers to provide external advice on market data, structure anddesign of incentives and also services to the Group on employee reward. In addition, PwC provided miscellaneous tax services to theGroup. Mercer were reappointed as actuaries to the Company’s pension scheme. Watson Wyatt Consultants provided advice to theRemuneration Committee on pension issues.

Louise Patten (Chairman) All Year

Ian Cheshire To 14 November 2008

Rod Kent To 14 November 2008

Stephen Webster To 14 November 2008

Michael Buckley From 25 November 2008

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Directors’ reportDirectors’ remuneration report continued

Remuneration policy Up until the Transfer, the objectives of the Remuneration policy, as stated in the 2007 report, were:

• to provide competitive total remuneration for on-target performance, with respect to comparable companies in the UK retailfinancial services sector; and

• to provide share-based incentive plans that facilitate the building of a significant stake in the Company by executive directors andkeep a balance between short and long-term focus.

Executive remuneration As stated in the 2007 report, total remuneration, up to the date of the Transfer, was heavily geared to performance. Prior to the Transfer,base salary represented 20% of the total package at maximum performance. Bradford & Bingley’s remuneration policy for 2009 andsubsequent years has yet to be formalised and cannot therefore be stated in this remuneration report. However, it will be structured toplace more importance on fixed pay.

The remuneration elements for 2008 are discussed below:

Basic salaryBasic salary is the only element of pay that is pensionable. Executive directors’ salaries were frozen for 2009 with effect from 1 January2009. It is proposed that salaries will be next reviewed on 1 January 2010.

Incentive arrangements - The Executive Incentive Plan (‘EIP’)During 2008, executive directors were eligible to participate in the EIP which encompasses both annual and three year performance. Noawards were made to executive directors under either the short term or the long term components of the EIP in 2008. This plan has nowlapsed and there will not be such a plan going forward for executive directors.

Employee share scheme Executive directors were eligible to participate in the Company’s all-employee share schemes on the same terms as other employeesduring 2008. All share schemes were extinguished at the time of the Transfer. However the Company’s share savings schemes remain asa cash investment vehicle.

Pensions and other benefitsRichard Pym and Chris Willford both receive an annual supplement of 30% of basic salary in lieu of any company pension benefit.

Roger Hattam receives a 30% salary supplement in respect of his basic salary above the earnings cap. He is an active member of thefinal salary based Staff Pension Scheme for basic salary up to the earnings cap, applied by the scheme (currently £117,600 pa).

Until his resignation as Executive Director on 21 April 2008, Robert Dickie received a 30% salary supplement on his full basic salary andhas deferred pension benefits in the final salary based Staff Pension Scheme.

Mark Stevens, until his resignation on 4 September 2008, received a 30% salary supplement in respect of his basic salary above theearnings cap. He was an active member of the final salary based pension scheme for basic salary up to the earnings cap applied to thescheme (currently £117,600 pa).

Steven Crawshaw received a 30% salary supplement on his full basic salary until his employment terminated on 31 August 2008 byreason of ill health. With effect from 1 September 2008 he receives an ill health early retirement pension.

In line with typical market practice, other executive benefits are provided to executive directors in the form of a company car (or cashallowance), housing allowance, private medical insurance, life assurance, permanent disability insurance and accident insurance. Thedirectors’ emoluments table is set out on page 27.


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Service agreementsGroup policy is to employ executive directors on one-year rolling contracts. It is not the Group’s policy to make extra-contractual paymentsto executive directors on termination of their service agreement and no such payments were made in 2008.

Directors’ service contracts

* On 20 February 2009, Richard Pym announced that he had decided to make a number of voluntary changes to his contract. These areset out below.

Termination arrangements for former executive directorsSteven Crawshaw, who was employed by the Company under a service contract dated 6 April 1999, retired as a director on 31 May 2008on the grounds of ill health, and his employment with the Company was terminated on 31 August 2008 on the same grounds. Hereceived payment of his basic salary in lieu of notice for the period up to 28 February 2009.

Robert Dickie, who was employed by the Company under a service contract dated 31 December 2002, resigned as a director on 21 April2008. In accordance with his terms of employment, he received payment of his basic salary and benefits in lieu of notice for the period,mitigated by him securing alternative employment. In addition, Robert Dickie received a bonus payment of £57,500 in respect of 2008 asdetermined under his compromise arrangements.

Mark Stevens, who was employed by the Company under a service contract dated 1 May 2007, resigned as a director on 4 September2008. In accordance with his terms of employment, he continued to receive his basic salary and benefits during the period of his noticeup until 28 February 2009.

Appointment of new Chief Executive Officer - remuneration packageRichard Pym was appointed as the new Chief Executive Officer on 18 August 2008 and became Executive Chairman on 14 November2008. A specific remuneration package was determined by the Board and the Remuneration Committee on his initial appointment, whichfor 2008 consisted of base salary, short and long term incentive arrangements.

He was provided with a contractual cash bonus, equivalent to 50% of basic salary for the period 18 August 2008 to 31 December 2008and an award of deferred Bradford & Bingley shares, equal to the value of the cash bonus. Following the Transfer, he waived anyentitlement to compensation for the deferred share element of the scheme. He was also granted a conditional award of share options tothe value of 200% of basic salary but as a result of the Transfer the award lapsed.

On 20 February 2009, Richard Pym announced that he had decided to make three voluntary changes to his contract with effect from 1April 2009:

i reduce his salary by £400,000 to £350,000.ii waive his entitlement to his contractual cash bonus of £187,500 due for the period from 1 January 2009 to 30 June 2009 together

with any further bonus entitlement in 2009.iii amend his contract from a minimum two year period to a notice period of one day.

Richard Pym*Steven CrawshawRobert DickieRoger HattamMark StevensChris Willford

Age at 31 December2008

594749403946

Date of service contract

18 August 20086 April 1999

31 December 20021 May 20071 May 2007

30 September 2005

Company’s notice period

12 months12 months12 months12 months12 months12 months

Director’s notice period

12 months12 months12 months

6 months6 months

12 months

Executive Director

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Non-executive Chairman and Non-executive Directors’ feesUp until 28 September 2008, fee levels for the Chairman were determined by the Remuneration Committee. Consistent with current bestpractice, the Chairman was not eligible to participate in any form of performance-related incentive plan.

Non-executive Chairman, Rod Kent, became Executive Chairman following the departure of Steven Crawshaw due to ill health andremained in that role until 14 November 2008. No additional remuneration was accepted by Rod Kent on taking these additionalresponsibilities.

Fee levels for the non-executive Directors were determined by a committee, which had a membership of the Executive Chairman and theGroup Finance Director. Fee levels were reviewed in 2008, following independent advice, and it was agreed they would remain at theexisting level. Non-executive directors do not participate in any incentive arrangements, do not have service contracts and do not receiveany other benefits.

Non-executive directorships Executive directors who hold non-executive directorships in other companies are permitted to retain their earnings from these posts.

Since his appointment, Richard Pym received £33,000 for his role as Non-executive Director of Old Mutual plc and £22,000 for his role asChairman of BrightHouse Group Limited.

Chris Willford received £12,500 for his role as a non-executive director of the Personal Accounts Delivery Authority, during 2008.

Compliance This report sets out the framework of remuneration policies and the tables show how this framework is applied to each individual directorin the year under review.


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Directors’ emoluments for the year ended 31 December 2008Payment Total Total

Basic in lieu of emoluments Bonus emolumentssalary/fees Benefits pension Bonus 2008 2007 2007

Executive £ £ £ £ £ £ £Richard Pym (appointed 18 August 2008) 278,842 4,831 83,653 139,344 506,670 - -Steven Crawshaw (retired 31 May 2008) 851,667 7,905 146,000 - 1,005,572 272,000 1,112,548Robert Dickie (resigned 21 April 2008) 402,500 28,124 120,750 57,500 608,874 66,000 480,500Roger Hattam 365,000 11,226 74,580 - 450,806 132,000 392,047Mark Stevens (resigned 4 September 2008) 425,834 13,097 86,950 - 525,881 132,000 392,047Chris Willford 500,000 25,626 150,000 - 675,626 157,500 700,572Total 2,823,843 90,809 661,933 196,844 3,773,429 759,500 3,077,714Non-executiveMichael Buckley 51,667 - - - 51,667 - 20,738 Ian Cheshire (resigned 14 November 2008) 40,000 - - - 40,000 - 48,000 Nicholas Cosh (resigned 14 November 2008) 62,500 - - - 62,500 - 71,250 Rod Kent (resigned 14 November 2008) 220,833 - - - 220,833 - 265,000 Louise Patten 58,000 - - - 58,000 - 54,667 Stephen Webster (resigned 14 November 2008) 58,333 - - - 58,333 - 70,000 Total 491,333 - - - 491,333 - 529,655 Total Directors’ emoluments 3,315,176 90,809 661,933 196,844 4,264,762 759,500 3,607,369

NotesBonus remuneration shown above reflects amounts payable in respect of 2008 for Richard Pym determined under contractual arrangements and for Robert Dickie determinedunder his compromise arrangements, pro-rata for time and performance.

Steven Crawshaw retired as a Director on 31 May 2008 on the grounds of ill health and his employment with the Company was terminated on 31 August 2008 on the samegrounds. In accordance with his terms of employment he received payment of £365,000 representing his basic salary in lieu of notice for the period up to 28 February 2009. Thewhole of this amount is included in the table above.

Robert Dickie resigned as a Director on 21 April 2008 and in accordance with his terms of employment, received payment of £398,168 representing his basic salary andbenefits, in lieu of notice for the period, mitigated by him securing alternative employment on 31 August 2008. This whole of this amount is included in the table above.

Mark Stevens resigned on 1 September 2008 and in accordance with his terms of employment, continued to receive basic salary and benefits of £220,222 during the period ofnotice until 28 February 2009. The whole of this amount is included in the table above.

Benefits received by Directors consist principally of the provision of a company car, health benefits and housing allowance. An amount in lieu of pension entitlement is shown.

Directors’ accrued pension entitlementsTransfer value

Accrued of increasepension Change Transfer Transfer in accrued

Age as at entitlement in accrued value at value at Change in pension31 Dec 31 Dec benefit 31 Dec 31 Dec transfer value 31 Dec

2008 2008 during 2008 2008 2007 during 2008 2008

Executive £000s £000s £000s £000s £000s £000sSteven Crawshaw (retired 31 May 2008) 47 125 - 3,589 1,876 1,713 672Robert Dickie (resigned 21 April 2008) 49 31 2 488 450 38 20Roger Hattam 40 34 4 393 350 43 17Mark Stevens (resigned 4 September 2008) 39 9 2 85 65 20 16

NotesPension disclosures are reported above in accordance with Directors’ Remuneration Report Regulations 2002.

The transfer values reported above reflect the capital value of the relevant pension assessed under market conditions at the end of 2008 and 2007 respectively. The change intransfer value during 2008 is reduced by the Directors’ contributions to the scheme during 2008. The change in the transfer value of Steven Crawshaw’s pension is due primarilyto his early retirement at the age of 47 on grounds of ill health.

The increase in accrued pension entitlement represents the change in the annual pension to which each Director is entitled as a result of changes in pensionable earnings,excluding inflation, and increases in pensionable service. Benefits have been valued at a retirement age of 60, with an adjustment made to the post 1 April 2005 benefits toreflect the fact these are reduced if paid before age 65.

Pension disclosures for Steven Crawshaw and Mark Stevens reflect entitlements, not only for their time as Directors, but whilst in employment for the whole of 2008.

In 2008, pension payments due to former Directors amounted to £157, 248 (2007: £243,954).

Steven Crawshaw elected to receive a Pension Commencement Lump Sum of £412,500 at retirement, and a reduced pension of £105,318pa.

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Directors’ executive incentive planDeferred Performance

shares Rights At Award Performance conditions MarketAt 31 Dec awarded in issue 31 Dec value (p) period Vesting for matching price on Date of

Executive 2007 year Vested adjustment Lapsed 2008 per share ends date shares vesting (p) vesting

Steven Crawshaw(retired 31 May 2008)EIP 2004 54,752 - 154,948 - - - 323.00 Dec-07 Feb-08 EPS growth 200.3 13/03/2008EIP 2005 61,338 - - 3,202 64,540 - 470.75 Dec-08 Feb-09 EPS growth - -EIP 2006 78,260 - - 4,086 82,346 - 460.00 Dec-09 Feb-10 EPS growth - -EIS 2007 - 375,524 - 19,607 395,131 - 181.08 Dec-07 Feb-10 Key business - -

objectives EIP 2007 - 150,692 - 7,868 158,560 - 180.50 Dec-10 Feb-11 EPS growth - -Robert Dickie(resigned 21 April 2008)EIP 2004 31,026 - 87,803 - - - 323.00 Dec-07 Feb-08 EPS growth 200.3 13/03/2008EIP 2005 23,791 - 23,791 - - - 470.75 Dec-08 Feb-09 EPS growth 77.25 24/06/2008EIP 2006 31,423 - 31,423 - - - 460.00 Dec-09 Feb-10 EPS growth 77.25 24/06/2008EIP 2007 - 36,565 36,565 - - - 180.50 Dec-08 Feb-09 EPS growth 77.25 24/06/2008Roger HattamEIP 2004 20,684 - 58,535 - - - 323.00 Dec-07 Feb-08 EPS growth 200.3 13/03/2008EIP 2005 18,056 - - 942 18,998 - 470.75 Dec-08 Feb-09 EPS growth - -EIP 2006 26,806 - - 1,362 27,448 - 460.00 Dec-09 Feb-10 EPS growth - -EIS 2007 - 182,239 - 9,515 191,754 - 181.08 Dec-07 Feb-09 Key business - -

objectivesEIP 2007 - 73,130 - 3,818 76,948 - 180.50 Dec-10 Feb-11 EPS growth - -Mark Stevens(resigned 4 September 2008)EIP 2004 20,684 - 58,535 - - - 323.00 Dec-07 Feb-08 EPS growth 200.3 13/03/2008EIP 2005 18,056 - - 942 - - 470.75 Dec-08 Feb-09 EPS growth - -EIP 2006 26,086 - - 1,362 - - 460.00 Dec-09 Feb-10 EPS growth - -EIS 2007 - 182,239 - 9,515 191,754 - 181.08 Dec-07 Feb-09 Key business - -

objectivesEIP 2007 - 73,130 - 3,818 76,948 - 180.50 Dec-10 Feb-11 EPS growth - -Chris WillfordEIP 2005 32,926 - - 1,719 34,645 - 470.75 Dec-08 Feb-09 EPS growth - -EIP 2006 40,760 - - 2,128 42,888 - 460.00 Dec-09 Feb-10 EPS growth - -EIS 2007 - 248,508 - 12,975 261,483 - 181.08 Dec-07 Feb-09 Key business - -

objectivesEIP 2007 - 87,257 - 4,556 91,813 - 180.50 Dec-10 Feb-11 EPS growth - -

NotesPursuant to the Transfer, all shares were transferred to the Treasury Solicitor as nominee for HM Treasury on 29 September 2008. The table represents the shareholding of eachDirector as at the date of the Transfer or on resignation (which ever was first).

The EIP 2004 award vested at the end of the three year period. The vested amount includes matching shares awarded subject to the achievement of EPS growth equivalent toRPI plus 3 - 8%.

The Remuneration Committee exercised discretion and allowed all subsisting awards for Robert Dickie to vest on 24/6/2008.

As a consequence of the rights issue, the number of shares under Bradford & Bingley’s schemes were adjusted by a factor of 1.0522.

On 26/9/2008 the closing mid-market price of ordinary shares in Bradford & Bingley plc was 20.0p and the range during the year 01/01/2008 to 29/09/2008 was 20.0p to278.75p (Source: Datastream).


B21448 R&A 2008 FRONT 23/3/09 13:33 Page 28



Directors’ share option grantsEarliest Latest

At 31 Dec Granted At 31 Dec Exercise exercise exerciseExecutive 2007 in year Exercised Lapsed 2008 price (p) date date

Richard Pym(appointed 18 August 2008)

Executive share option scheme - 2,739,726 - 2,739,726 - 54.75 Aug-11 Aug-13

Steven Crawshaw(retired 31 May 2008)

Executive share option scheme

Prior to appt as Executive Director 48,863 - - 48,863 - 291.83 Mar-04 Mar-11Post appt as Executive Director 60,205 - - 60,205 - 315.58 Mar-05 Mar-12Post appt as Executive Director 81,655 - - 81,655 - 281.67 Feb-06 Feb-13Savings-related share option scheme

Post appt as Executive Director 4,331 - - 4,331 - 371.66 May-11 Oct-11Post appt as Executive Director - 11,596 - 11,596 - 144.87 May-13 Oct-13

Robert Dickie(resigned 21 April 2008)

Executive share option scheme

Prior to appt as Executive Director 81,655 - - 81,655 - 281.67 Feb-06 Feb-13

Roger HattamExecutive share option scheme

Prior to appt as Executive Director 3,149 - - 3,149 - 311.67 Sep-04 Sep-11Prior to appt as Executive Director 16,160 - - 16,160 - 315.58 Mar-05 Mar-12Prior to appt as Executive Director 21,301 - - 21,301 - 281.67 Feb-06 Feb-13Savings-related share option scheme


Mark Stevens(resigned 4 September 2008)

Savings-related share option scheme

Prior to appt as Executive Director 1,836 - - 1,836 - 257.93 May-08 Oct-08Prior to appt as Executive Director 1,267 - - 1,267 - 372.73 May-10 Oct-10Post appt as Executive Director - 6,626 - 6,626 - 144.87 May-11 Oct-11

Chris WillfordSavings-related share option scheme


NotesAll share options lapsed during the year due to the Transfer. The table represents the shareholding of each Director as at the date of the Transfer or on resignation (whicheverwas first).

The share options exercise price was not adjusted as a consequence of the rights issue, under Bradford & Bingley schemes.

An award was granted to Richard Pym under the Executive Share Options Scheme as part of his appointment, however it lapsed during the year.

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Directors’ reportCorporate social responsibilityBradford & Bingley’s aim is to conduct its business in a socially responsible manner in respect of employees, customers, local communitiesand the environment.

Workplace and employeesBradford & Bingley’s employment practices reflect international and national standards covering areas such as minimum working age,working hours, health and safety, and discrimination.

The Group promotes diversity and equality across all aspects of working life and believes it is important to share best practice and success.Opportunities are provided for all staff to develop their skills and knowledge.

Bradford & Bingley is a member of Opportunity Now, the Employers’ Forum on Disability and the Employers’ Forum on Age. Theseorganisations look at ways to promote awareness of disability, age, race and gender within the workplace.

The Group recognises that the health and wellbeing of employees is vital to the business. Comprehensive policies have been agreed withUBAC, the recognised staff union, on Flexible Working and Fair Treatment at Work.

CustomersBradford & Bingley has c. 300,000 mortgage customers to serve and manage, and endeavours to treat each customer as an individual,with openness, honesty and integrity. The Group complies with the FSA’s formal framework for Treating Customers Fairly.

Bradford & Bingley works closely with those customers experiencing payment difficulties to exhaust all reasonable efforts beforecommencing repossession proceedings, which is viewed as a last resort.

Community During 2008, Bradford & Bingley continued its investment into the community especially in Bradford and the Aire Valley, where themajority of our employees live and work.

In 2008, we focused on two areas of local community support, preventing and alleviating the causes of homelessness and promotingpersonal finance education:

• Business Action on Homelessness (‘BAOH’) is the flagship programme of Business in the Community. BAOH is a unique partnershipbetween leading businesses, homelessness agencies and the government, which aims to help homeless people to findemployment and achieve independent living.

• the UK Career Academy Foundation, which leads and supports a national movement of employers, schools and colleges, workingto raise the aspirations of 16 to 19 year-olds who are considering a career in finance.

Employees at our offices in Bingley and Crossflatts voted for Sue Ryder Care at Manorlands to be Bradford & Bingley’s charity of the yearin 2008 and fundraising activities helped to raise over £25,000 for the charity. The Community Action Team, which consists of volunteersfrom across all functions of the business, assisted 37 other local charities and community groups with funding and support.

Bradford & Bingley supports other fundraising activities by matching the first £250 of funds raised per employee and by matchingemployee donations through a payroll-giving programme. During the year, Bradford & Bingley matched employee fundraising to the totalof £26,443 and matched £97,477 of employee donations.

The environment During 2008, Bradford & Bingley sought to improve its environmental performance through a number of initiatives. In order to reduce thenumber of single occupancy vehicles travelling to and from its West Yorkshire offices, the Group provided a shuttle service between itstwo Aire Valley sites and promoted car sharing by offering staff guaranteed parking spaces.

Bradford & Bingley is a member of the West Yorkshire Metro Travel Network and promotes its commitment to environmentally friendlytravel by offering employees discounted annual travel tickets for the West Yorkshire area.

The main waste streams produced by Bradford & Bingley consist of general office waste, confidential paper waste and IT equipment.There are procedures in place to recycle paper, plastic, aluminium, toners, metals, IT components and mobile phones.

Corporate social responsibility in 2009 Since the Transfer, Bradford & Bingley is primarily based in Bingley, West Yorkshire. The 2009 programme will be focused entirely onsupporting the Aire Valley community in which the majority of employees live as well as work. The Community Action Team will continueto consider requests for funds from local community groups and charities and will continue to support local schools and charities withvolunteering initiatives.


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Directors’ reportStatement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report & Accounts and the financial statements in accordance with applicable lawand regulations.

Company law requires the Directors to prepare the Group and Parent Company financial statements for each financial year. Under thatlaw they have elected to prepare both the Group and Parent Company financial statements in accordance with IFRSs as adopted by theEU and applicable law.

The Group and Parent Company financial statements are required by law and IFRS as adopted by the EU to present fairly the financialposition of the Group and Parent Company and the performance for that period; the Companies Act 1985 provides in relation to suchfinancial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references totheir achieving a fair presentation.

In preparing each of the Group and Parent Company financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;• make judgements and estimates that are reasonable and prudent;• state whether they have been prepared in accordance with IFRS as adopted by the EU; and• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Parent

Company will continue in business.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financialposition of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They havegeneral responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent anddetect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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Directors’ reportOther matters Directors’ interestsFollowing the Transfer on 29 September 2008, no Director has any interests in shares in the Company.

Details of the Directors’ interests in the shares of the Company at 31 December 2007 and 28 September 2008 were as follows:

The beneficial holdings shown above include the Director’s personal holdings and those of their spouses and minor children.

Contingent interests in shares shown above represent shares over which the Directors had conditional rights under the ExecutiveIncentive Plan and Executive Incentive Scheme 2007.

Pursuant to the terms of the Transfer, all shares were transferred to the Treasury Solicitor as nominee for HM Treasury on 29 September2008 and all contingent interests lapsed.

No Director had any material interest during the year in any contract of significance to the Group’s business.

The Company’s Articles of Association provide for an indemnity to the Directors against certain liabilities incurred as a result of performingtheir duties as Directors. The indemnities extend to liability for any loss or liability in respect of proven and alleged negligence, default,breach of duty or breach of trust in relation to the affairs of the Company. In addition the Company arranges Directors’ and Officers’liability insurance on behalf of its directors in accordance with the provisions of its Articles and the Companies Act 2006.

Principal activitiesThe principal activities of the Group are explained in the Business Review on pages 5 to 6.

Review of business, future developments, principal risks and uncertaintiesA review of the business including future developments, principal risks and uncertainties is set out in the Business Review on pages 5 to 6.

Property, plant and equipmentLand and buildings, which are included in the balance sheet at cost less accumulated depreciation and impairment losses amounted to£12.2m at 31 December 2008. In the Directors’ opinion, based on valuations carried out by the Group’s external qualified CharteredSurveyors, the total market value of those assets at that date was not significantly different.

DividendsIn the Interim Financial Report published on 29 August 2008, the Board announced an interim dividend for 2008 of 3.0 pence per share.This was to be paid to shareholders as a scrip dividend on 6 October 2008. Approval for the payment of the dividend in shares had beengiven by the Shareholders at the Extraordinary General Meeting held on 17 July 2008. Pursuant to the terms of The Bradford & Bingley plcTransfer of Securities and Property etc. Order 2008, all shares were transferred to the Treasury Solicitor as nominee for HM Treasury on 29September 2008 and the dividend was not paid.

The Directors do not propose any further dividend for the year ended 31 December 2008.

Michael BuckleyRoger HattamLouise PattenChris Willford

At 28 September2008

79,560184,573111,150152,685

At 31 December2007 (or date of

appointment, if later)

-20,343

7,500250

At 28 September2008

-315,148

-430,829

At 31 December2007 (or date of

appointment, if later)

-64,826

-73,686

Contingent Interests


B21448 R&A 2008 FRONT 23/3/09 13:33 Page 32


Directors’ reportOther matters continued

SharesDuring 2008, the Company raised approximately £401m via a 67 for 50 ordinary shares rights issue at 55 pence per share. Shareholdersapproved the rights issue at an Extraordinary General Meeting held on 17 July 2008, where it was agreed that the authorised sharecapital of the Company, comprising ordinary shares of 25 pence each, be increased from 882,000,000 shares to 1,845,269,249 shares bythe creation of an additional 963,269,249 shares. Shareholders also authorised the directors to allot shares for the purposes of the rightsissue and on 18 August 2008, 827,670,240 ordinary shares were allotted, increasing the issued ordinary share capital from 617,674,534shares to 1,445,344,774 shares. The number of ordinary shares of 25 pence each in issue at 31 December 2007 was 617,674,534 andat 28 September 2008 was 1,445,344,774.

At the AGM in 2008, a resolution was passed authorising the Company to purchase up to 61,700,000 ordinary shares. This was arenewal of the authority granted in previous years. This authority was not used and expires at the Annual General Meeting in 2009.

On 29 September 2008 pursuant to the terms of the Transfer, all shares were transferred to the Treasury Solicitor as nominee for HM Treasury.

Major shareholdersAt 28 September 2008, the following interests of 3% or more in the total voting rights of the issued share capital of the Company hadbeen notified in accordance with the Disclosure and Transparency Rules of the FSA:

Compensation orderOn 29 September 2008 pursuant to the terms of The Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008, all shareswere transferred to the Treasury Solicitor as nominee for HM Treasury.

HM Treasury has announced its intention to appoint an independent valuer to determine the amount of compensation payable, if any, byHM Treasury to those whose shares were transferred or whose rights were otherwise affected by the Transfer Order.

Employee involvementDuring the year we have continued to maintain and develop policies and approaches which enable:

• sharing information with employees;• consultation with employees and decisions affecting employees’ interests;• encouraging employee involvement in the Company’s performance; and• achieving a common awareness on the part of all employees of the financial and economic factors affecting the performance of

the Company.

Corporate Social ResponsibilityBradford & Bingley is committed to carrying out its activities in a socially responsible manner in respect of the environment, employees(including equal opportunities, employee participation and staff incentives), customers, local communities and other stakeholders.

Standard Life Investments Ltd 9.607%

Barclays Bank PLC 7.020%

HBOS plc 6.774%

Axa S.A. and Group Companies 6.024%

Invesco Ltd 4.838%

Citigroup Global Market Equity Ltd 4.671%

Legal & General Group plc 4.000%

Lloyds TSB Group plc 3.963%

The Royal Bank of Scotland Group plc 3.732%

Prudential plc 3.461%

Further details of the Company’s authorised and issued share capital are provided in note 32 to the Accounts

75�

Further details can be found on page 30�

B21448 R&A 2008 FRONT 23/3/09 13:33 Page 33

Directors’ reportOther matters continued

Charitable and political donationsDuring 2008, the Group allocated £1.4m to its programme of community investment, including payments to charitable organisations of £0.5m.

No contributions were made for political purposes in 2008. We do not make any payments that might be deemed to be political in nature.

Creditor payment policyIt is the policy of the Company to pay creditor invoices within 30 days of the invoice date. The Company is willing to consider requests by smallsuppliers for a shorter settlement period. The average number of creditor days in 2008 was 14 days (2007: 13 days).

Annual General MeetingIt is proposed that the AGM will be held on 28 April 2009 and the special business will include resolutions to amend the Company’s Articles ofAssociation to reflect public ownership and to incorporate certain provisions of the Companies Act 2006.

AuditorA resolution to re-appoint KPMG Audit Plc will be put to the Shareholder at the forthcoming AGM.

Disclosure of information to the AuditorAs at the date of this report each person who is a Director confirms that:

• so far as each Director is aware there is no relevant audit information of which the Company’s auditor is unaware; and • each Director has taken such steps as he or she should have taken as a Director in order to make him or herself aware of any

relevant audit information and to establish that the Company’s auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of Section 234ZA of the Companies Act 1985.

Paul HopkinsonCompany Secretary, on behalf of the Board5 March 2009


Further details can be found on page 30�

Further details can be found on pages 16-18�

B21448 R&A 2008 FRONT 23/3/09 13:33 Page 34

The accounts36 Independent Auditor’s report37 Consolidated income statement38 Balance sheets39 Statements of recognised income and expense40 Cash flow statements41 Notes to the financial statements

Page Note

41 1. Principal accounting policies

46 2. Gain/(loss) on sale of assets and

liabilities

46 3. Net interest income

47 4. Administrative expenses

47 5. Staff costs and numbers

48 6. Taxation

48 7. Dividends

49 8. Loans and advances to banks

49 9. Loans and advances to customers

50 10. Loan impairment loss

54 11. Acquisitions of mortgage portfolios

54 12. Securitised assets and secured funding

58 13. Debt securities

62 14. Investment Impairment loss

62 15. Prepayments and accrued income

63 16. Investments in Group undertakings

64 17. Other assets

64 18. Deferred taxation

66 19. Property, plant and equipment

68 20. Intangible assets

68 21. Deposits by banks

68 22. Other deposits

69 23. HM Treasury Working Capital Facility

69 24. Statutory Debt

69 25. Debt securities in issue

70 26. Other liabilities

70 27. Accruals and deferred income

70 28. Post-retirement benefit obligations

73 29. Provisions

74 30. Subordinated liabilities

74 31. Other capital instruments

75 32. Share capital

76 33. Reconciliation of changes in equity

77 34. Share-based payments

81 35. Operating lease commitments

81 36. Other commitments

81 37. Related party disclosures

83 38. Critical accounting judgements and

estimates

84 39. Capital structure

84 40. Financial instruments

91 41. Risk management

98 42. Controlling party

98 43. Contingent liabilities


B21448 R&A 2008 BACK 20/3/09 17:36 Page 41

Independent Auditor’s report to the membersof Bradford & Bingley plcWe have audited the Group and Parent Company Financial Statements (the ‘Financial Statements’) of Bradford & Bingley plc for the year ended 31December 2008 which comprise the Consolidated Income Statement, the Group and Parent Company Balance Sheets, the Group and ParentCompany Statements of Recognised Income and Expense, the Group and Parent Company Cash Flow Statements and the related notes. TheseFinancial Statements have been prepared under the accounting policies set out therein.

This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work hasbeen undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and forno other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and theCompany’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorsThe Directors’ responsibilities for preparing the Annual Report and the Financial Statements in accordance with applicable law and InternationalFinancial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ Responsibilities on page 31.

Our responsibility is to audit the Financial Statements in accordance with relevant legal and regulatory requirements and International Standards onAuditing (UK and Ireland).

We report to you our opinion as to whether the Financial Statements give a true and fair view and whether the Financial Statements have beenproperly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in theDirectors’ Report is consistent with the Financial Statements.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the informationand explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is notdisclosed.

We read the other information contained in the Annual Report & Accounts and consider whether it is consistent with the audited Financial Statements.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the FinancialStatements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An auditincludes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Statements. It also includes anassessment of the significant estimates and judgements made by the Directors in the preparation of the Financial Statements, and of whether theaccounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide uswith sufficient evidence to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused byfraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in theFinancial Statements.

OpinionIn our opinion:• the Group Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at

31 December 2008 and of its profit for the year then ended; • the Parent Company Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance

with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2008;• the Financial Statements have been properly prepared in accordance with the Companies Act 1985; and• the information given in the Directors’ Report is consistent with the Financial Statements.

Emphasis of matterIn forming our opinion on the Financial Statements, which is not qualified, we have considered the adequacy of the disclosures made within thebasis of preparation section of the Accounting Policies. The continued availability of the financing facilities and guarantee arrangements providedby HM Treasury, upon which the Group and Company are reliant, is conditional upon approval by the European Commission under the state aidrules. This condition indicates the existence of a material uncertainty, which may cast significant doubt on the Group’s and Company’s ability tocontinue as a going concern. The Financial Statements do not include adjustments that would result if the Company was unable to continue totrade as a going concern.

KPMG Audit Plc Chartered Accountants Registered AuditorLeeds5 March 2009


B21448 R&A 2008 BACK 20/3/09 17:36 Page 42


Consolidated Income StatementFor the year ended 31 December

2008 2007Note £m £m

Interest receivable and similar income 3,121.8 2,967.5Interest expense and similar charges (2,384.4) (2,419.8)Net interest income 3 737.4 547.7Fee and commission income 63.3 81.7Realised gains less losses on financial instruments 40g (120.3) 6.5Fair value movements 40g 183.0 (49.7)Hedge ineffectiveness 40g 18.5 (23.5)Other operating income 4.8 9.6Net operating income 886.7 572.3Administrative expenses:

- Ongoing 4 (253.2) (280.2)- Other net expenses 4 (23.7) -

Loan impairment loss 10 (507.7) (22.5)Investment impairment loss 14 (191.6) (94.4)Gain/(loss) on sale of assets and liabilities 2 216.3 (58.0)Non-operating income 19 7.5 8.8Profit before taxation 134.3 126.0Taxation 6 (116.1) (32.8)Profit for the financial year 18.2 93.2The notes on pages 41 to 98 form part of these Financial Statements.The Company’s profit after tax for the financial year was £232.9m (2007: £38.2m). As permitted by Section 230 of the Companies Act 1985, the Company’s Income Statementhas not been presented in these Financial Statements.The Group’s business and operations comprise one single activity, principally within the United Kingdom. The results above arise from continuing activities and are attributable tothe equity shareholder.

B21448 R&A 2008 BACK 20/3/09 17:36 Page 43

Balance SheetsAt 31 December

Group Company2008 2007 2008 2007

Note £m £m £m £m

AssetsCash and balances at central banks 100.4 209.2 100.4 209.2Treasury bills - 185.0 - 185.0Loans and advances to banks 8 3,349.2 2,392.1 1,380.8 1,901.9Loans and advances to customers 9 41,826.0 40,444.5 58,622.1 51,435.4Fair value adjustments on portfolio hedging 40 561.3 (53.8) 561.3 (53.8)Debt securities 13 4,024.7 6,778.7 12,273.4 7,398.2Derivative financial instruments 40g 6,022.9 1,175.4 1,734.9 468.6Prepayments and accrued income 15 18.3 28.5 8.8 22.1Investments in Group undertakings 16 - - 1,244.7 543.7Other assets 17 2.7 653.7 1.4 652.3Current tax assets - - - 39.3Deferred tax assets 18 - 23.8 183.1 21.8Property, plant and equipment 19 17.1 106.5 13.3 95.8Intangible assets 20 - 41.0 - 12.6Total assets 55,922.6 51,984.6 76,124.2 62,932.1LiabilitiesDeposits by banks 21 9,318.5 2,074.4 8,143.9 1,658.5Other deposits 22 828.1 24,152.6 30,285.4 43,601.8Statutory Debt 24 18,413.9 - 18,413.9 -HM Treasury Working Capital Facility 23 2,275.7 - 2,275.7 -Fair value adjustments on portfolio hedging 40 - (5.9) - (5.9)Derivative financial instruments 40g 1,230.2 498.6 1,309.4 483.2Debt securities in issue 25 20,666.3 22,308.1 13,364.0 14,409.1Other liabilities 26 80.7 141.2 66.2 128.1Accruals and deferred income 27 83.6 84.1 84.8 85.4Current tax liabilities 66.7 23.7 49.3 -Deferred tax liabilities 18 90.9 - - -Post-retirement benefit obligations 28 9.2 22.0 9.2 22.0Provisions 29 83.6 59.7 83.6 59.7Subordinated liabilities 30 1,348.7 1,253.7 1,691.6 1,565.3Other capital instruments 31 268.4 161.6 - -Total liabilities 54,764.5 50,773.8 75,777.0 62,007.2EquityIssued capital and reserves attributable to equity holder of the parent:

- Share capital 32, 33 361.3 154.4 361.3 154.4- Share premium reserve 33 198.9 4.9 198.9 4.9- Capital redemption reserve 33 29.2 29.2 29.2 29.2- Available-for-sale reserve 33 (348.1) (61.9) (1,087.9) (61.9)- Cash flow hedge reserve 33 (148.5) (60.4) (148.5) (60.4)- Retained earnings 33 1,065.3 1,144.6 994.2 858.7

Share capital and reserves 1,158.1 1,210.8 347.2 924.9Total equity and liabilities 55,922.6 51,984.6 76,124.2 62,932.1The notes on pages 41 to 98 form part of these Financial Statements.

The Financial Statements were approved by the Board of Directors and authorised for issue on 5 March 2009 and signed on its behalf by:

Richard PymExecutive Chairman

Chris WillfordGroup Finance Director


B21448 R&A 2008 BACK 20/3/09 17:36 Page 44


Statements of Recognised Income and ExpenseFor the year ended 31 December

Group Company2008 2007 2008 2007

£m £m £m £m

Available-for-sale instruments- Net losses recognised in equity during the year (312.7) (82.9) (1,340.3) (83.0)- Amounts transferred from equity and recognised in profit during the year 90.9 (3.4) 90.9 (3.4)

Cash flow hedges- Net losses recognised in equity during the year (116.5) (110.5) (116.5) (110.5)- Amounts transferred to profit and loss for the year (5.9) (2.8) (5.9) (2.8)

Actuarial (losses)/gains on post-retirement benefit obligations (17.8) 53.3 (17.8) 53.3Taxation on the above items taken directly to equity (25.1) 42.8 262.7 42.8Net expense recognised directly in equity (387.1) (103.5) (1,126.9) (103.6)Profit for the financial year 18.2 93.2 232.9 38.2Total recognised expense for the financial year (368.9) (10.3) (894.0) (65.4)

B21448 R&A 2008 BACK 20/3/09 17:37 Page 45

Group Company2008 2007 2008 2007

£m £m £m £m

Cash flows from operating activitiesProfit for the financial year 18.2 93.2 232.9 38.2Adjustments to reconcile net profit to cash flow from/(used in) operating activities

- Income tax charge 116.1 32.8 136.3 2.6- Depreciation and amortisation 19.3 22.6 13.3 12.2- Loan impairment loss 509.0 29.3 268.5 4.6- Investment impairment loss 191.6 94.4 191.6 94.4- Recoveries of loans and advances previously written off (1.3) (6.8) (1.2) (4.5)- (Gain)/loss on sale of assets and liabilities (216.3) 58.0 (433.9) 58.0- Interest on subordinated liabilities and other capital instruments 91.9 91.7 102.9 102.4- Net profit on sale of property, plant and equipment and intangible assets (7.5) (4.3) (7.5) (4.5)- Gains less losses on sale of debt securities 90.9 (3.4) 90.9 (3.4)

Cash flows from operating activities before changes in operating assets and liabilities 811.9 407.5 593.8 300.0Net (increase)/decrease in operating assets

- Loans and advances to banks and customers 425.8 (3,395.3) (7,348.9) (12,774.0)- Net proceeds from sale of assets 645.9 3,294.8 645.9 3,294.8- Acquisitions of mortgage portfolios (1,986.6) (4,337.9) - -- Debt securities 1,339.0 (119.3) (6,260.1) (1,063.3)- Derivative financial instruments (4,847.5) (884.4) (1,266.3) (190.4)- Prepayments and accrued income 10.1 (3.5) 13.3 (1.7)- Other assets 5.1 (632.4) 5.0 (632.4)

Net increase/(decrease) in operating liabilities- Deposits by banks and other deposits (16,047.5) 2,396.0 (6,838.2) 7,299.7- Derivative financial instruments 731.6 5.2 826.2 74.4- Debt securities in issue 546.6 (701.5) 784.3 329.0- Other liabilities (62.0) (35.6) (65.9) (41.0)- Accruals and deferred income (136.4) 210.1 4.9 171.9- Provisions (20.5) (35.1) (33.8) (35.1)- Income taxes received/(paid) 19.5 (80.4) 53.7 (61.8)- Other non-cash items (852.7) (165.9) (1,880.6) (165.6)

Net cash used in operating activities (19,417.7) (4,077.7) (20,766.7) (3,495.5)Cash flows from investing activities

- Proceeds from sale of savings related assets and liabilities 612.0 - 612.0 -- Cash balances transferred on sale of savings business (76.8) - (12.6) -- Purchase of property, plant and equipment and intangible assets (23.9) (34.3) (19.2) (26.9)- Proceeds from sale of property, plant and equipment 13.0 14.5 10.1 12.2- Realisation of investment in subsidiary undertaking - - 100.0 -- Capital injection into subsidiary undertakings - - (811.0) -

Net cash from/(used in) investing activities 524.3 (19.8) (120.7) (14.7)Cash flows from financing activities

- Purchase of own shares held to satisfy employee share plans - (18.7) - (18.7)- Purchase of own shares for cancellation - (58.6) - (58.6)- Proceeds from disposal of own shares 3.3 5.2 3.3 5.2- HM Treasury Working Capital Facility 2,275.7 - 2,275.7 -- Statutory Debt 18,413.9 - 18,413.9 -- Proceeds from rights issue 400.9 - 400.9 -- Net proceeds from secured funding 689.3 6,437.7 689.3 6,437.7- Repayments and purchases of secured funding (2,850.4) (1,374.2) (2,516.8) (1,254.6)- Interest paid on subordinated liabilities and other capital instruments (92.2) (79.7) (103.2) (90.5)- Dividends paid (87.9) (126.5) (87.9) (126.5)

Net cash from financing activities 18,752.6 4,785.2 19,075.2 4,894.0Net (decrease)/increase in cash and cash equivalents (140.8) 687.7 (1,812.2) 1,383.8Cash and cash equivalents at beginning of year 4,335.3 3,647.6 4,068.4 2,684.6Cash and cash equivalents at end of year 4,194.5 4,335.3 2,256.2 4,068.4Represented by cash and assets with original maturity of three months or less within

- Cash and balances at central banks 17.3 21.0 17.3 21.0- Treasury bills - 185.0 - 185.0- Loans and advances to banks 3,317.9 2,137.5 1,380.8 1,901.9- Debt securities 859.3 1,991.8 858.1 1,960.5

4,194.5 4,335.3 2,256.2 4,068.4Balances maintained with the Bank of England 83.1 188.2 83.1 188.2The Group maintains balances with the Bank of England as shown above. These balances are not included in cash and cash equivalents for the purposes of the Cash Flow Statement.

Cash Flow Statements For the year ended 31 December


B21448 R&A 2008 BACK 20/3/09 17:37 Page 46


Notes to the Financial Statements

1. Principal accounting policiesBradford & Bingley plc (‘the Company’) is apublic limited company incorporated in theUnited Kingdom under the Companies Act1985 and registered in England and Wales.

These Financial Statements were authorisedfor issue by the Directors on 5 March 2009and will be put to the shareholder for approvalat the Company’s Annual General Meeting tobe held on 28 April 2009.

(a) Statement of complianceThe Group Financial Statements incorporateon a fully consolidated basis the FinancialStatements of the Company and thoseentities (including special purpose structures)which are controlled by the Company (itssubsidiaries), together referred to as ‘theGroup’. The Company Financial Statementspresent information about the Company as aseparate entity and not about its group.

Both the Company Financial Statements andthe Group Financial Statements have beenprepared and approved by the Directors inaccordance with International FinancialReporting Standards as adopted by theEuropean Union (‘adopted IFRS’). In publishingthe Company Financial Statements heretogether with the Group Financial Statements,the Company has taken advantage of theexemption in s230 of the Companies Act 1985not to present its individual Income Statementand related notes.

For these 2008 Financial Statements, includingthe 2007 comparative financial informationwhere applicable, the Group and Companyhave adopted for the first time the followingstatements:

• The revisions to IAS 39 ‘FinancialInstruments: Recognition andMeasurement’ and IFRS 7 ‘FinancialInstruments: Disclosures’ issued by the IASBin October 2008 and effective from July2008. These revisions permitreclassification of certain financialinstruments out of the ‘fair value throughprofit or loss’ and ‘available-for-sale’categories, under certain circumstances,and require disclosure of suchreclassifications. Further details of the policychange are provided in paragraph 1(j)below. In practice, no financial assets havebeen reclassified out of the ‘fair valuethrough profit or loss’ or ‘available-for-sale’categories.

• IFRIC 11 ‘IFRS 2 - Group and Treasury ShareTransactions’ issued by IFRIC in November2006. This provides guidance onaccounting for share-based paymentswhich are satisfied by purchasing existingshares in the Company, and also guidanceon accounting for share-based payment ofemployees of the Company’s subsidiaryundertakings. Adoption of this statementhas had no material impact on the Group’sor Company’s Income Statements, BalanceSheets or Cash Flow Statements.

• IFRIC 14 ‘IAS 19 - The Limit on a DefinedBenefit Asset, Minimum Funding

Requirements and their Interaction’ issuedby IFRIC in July 2007. This statement limitsthe extent to which a surplus in respect of adefined benefit pension scheme may berecognised in the Balance Sheet. Furtherdetails of the policy change are provided inparagraph 1(f) below, and details of theimpact on the Group’s and Company’sFinancial Statements are provided in note28.

For these 2008 Financial Statements theGroup and Company have not adopted thefollowing statements:• The February 2008 amendment to IAS 1

‘Presentation of Financial Statements’,which is mandatory for 2009 financialstatements. This relates to disclosures only,and adoption would have no impact on theGroup’s or the Company’s IncomeStatements, Balance Sheets or Cash FlowStatements.

• IFRS 8 ‘Operating Segments’ issued by theIASB in November 2006 and mandatory for2009 financial statements. This relates todisclosures only, and adoption would haveno impact on the Group’s or the Company’sIncome Statements, Balance Sheets orCash Flow Statements.

(b) Basis of preparationThe Financial Statements are prepared on thehistorical cost basis except:

(i) the following assets and liabilities arecarried at their fair value:• derivative financial instruments;• financial instruments categorised under IAS

39 as ‘at fair value through profit or loss’;and

• financial instruments categorised under IAS39 as ‘available-for-sale’; and

(ii) where fair value hedge accounting hasbeen applied, the carrying value of hedgeditems has been adjusted to take account ofthe fair value of the risk which has beenhedged.

In the application of these accounting policiesthe Directors have made judgements thathave a significant effect on the FinancialStatements and have also made estimatesthat have a significant risk of giving rise tomaterial adjustment in the next year; thesejudgements and estimates are discussed innote 38 to the Financial Statements.

The Directors consider that the accountingpolicies set out in this note are the mostappropriate to the Group’s and theCompany’s circumstances, have beenconsistently applied both to the Group and theCompany in dealing with items which areconsidered material, and are supported byreasonable and prudent estimates andjudgements. The accounting policies havebeen applied to all periods presented in theseFinancial Statements and are consistent withthe accounting policies used by the Group inpreparing its Interim Financial Information forthe six months ended 30 June 2008 exceptfor the adoption of the revisions to IAS 39

‘Financial Instruments: Recognition andMeasurement’ and IFRS 7 ‘FinancialInstruments: Disclosures’ issued by the IASB inOctober 2008 and of IFRIC 11 ‘IFRS 2 - Groupand Treasury Share Transactions’ issued byIFRIC in November 2006. The Interim FinancialInformation was prepared having regard tothe principles of IFRIC 14 ‘IAS 19 - The Limit ona Defined Benefit Asset, Minimum FundingRequirements and their Interaction’ issued byIFRIC in July 2007, though as at 30 June 2008IFRIC 14 had not been endorsed for use by theEuropean Union.

The Financial Statements are presented inpounds sterling, which is the currency of theGroup’s and Company’s primary operatingenvironment and their functional currency.

The Group’s business and operationscomprise one single continuing activity, andhence no segmental analysis has beenprovided.

The Financial Statements are presented on agoing concern basis.

Principles underlying going concern basisThe Financial Statements of the Group andCompany have been prepared on a goingconcern basis. The validity of this basis isdependent on the funding position of theCompany. At the date of approval of theseFinancial Statements the Group and Companyare reliant on the financing facilities and alsoupon the guarantee arrangements providedto the Company by HM Treasury. However, thecontinued availability of these facilities isconditional upon approval by the EuropeanCommission under the state aid rules anduntil such approval is granted, there isconsidered to be a material uncertainty whichmay cast significant doubt on the Group’s andCompany’s ability to continue on a goingconcern basis and to realise their assets anddischarge their liabilities in the normal courseof business. If the financing facilities andguarantee arrangements were withdrawn theCompany and other companies in the Groupmay not be able to meet their financial orfunding obligations, which would have asignificant impact on the Group’s operations,and adjustments may have to be made toreduce the monetary value of assets and toprovide for further liabilities that may arise.

(c) Basis of consolidationThe Group’s Financial Statements incorporateon a fully consolidated line-by-line basis theFinancial Statements of the Company andthose entities (including special purposestructures) which are controlled by theCompany (its subsidiaries). Control is achievedwhere the Company has the power to governthe financial and operating policies of aninvestee entity so as to obtain benefits from itsactivities. Where subsidiaries have beenacquired during a period, their results areconsolidated into the Group’s FinancialStatements from the date control istransferred to the Group. Where subsidiarieshave been disposed of, their results areconsolidated to the date of disposal. On the

B21448 R&A 2008 BACK 20/3/09 17:37 Page 47


acquisition of a business, fair values areattributed to the assets, liabilities andcontingent liabilities acquired. Any differencebetween the consideration given and the fairvalue of the net assets acquired is capitalisedas goodwill.

The Group has securitised various residentialmortgage loans, generally by sale or transferto special purpose structures which in turnissue securities to investors. The specialpurpose structures are consolidated line byline into the Group Financial Statements if theyare, in substance, controlled by the Company.The Group presently receives substantially allof the post-tax profits of all the SpecialPurpose Vehicle (‘SPV’) entities and henceretains substantially all of the risks andrewards of the securitised loans, andconsequently all of the SPVs are fullyconsolidated.

(d) Interest income and expenseFor all interest-bearing financial instrumentsexcept derivatives, interest income andexpense are recognised in the IncomeStatement on an Effective Interest Rate (‘EIR’)basis.

The EIR basis spreads the interest income orinterest expense over the expected life of theinstrument. The EIR is the rate that at theinception of the instrument exactly discountsexpected future cash payments and receiptsthrough the expected life of the instrumentback to the initial carrying amount. Whencalculating the EIR, future cash flows areestimated, considering all contractual terms ofthe instrument (for example prepaymentoptions), but potential future credit losses arenot considered. The calculation includes alldirectly attributable incremental fees andcosts, premia on acquisition of mortgageportfolios and all other premia and discountsas well as interest.

(e) Fee and commission incomeWhere Value Added Tax (VAT) is charged,income is stated net of VAT.

Commission receivable from the sale of thirdparty Regulated Financial Services products isrecognised as income within ‘fee andcommission income’ when the policy goes ‘onrisk’, net of any provision for repayment in theevent of early termination by the customer. Ifthe commission is receivable on deferredterms, a deemed interest element of thecommission is separated and recognised onan EIR basis over the deferred payment period.

Fee and commission income arises on variousother activities and is accounted for within ‘feeand commission income’ in the IncomeStatement on an accruals basis as the servicesare performed. Fee and commission incomeincludes items relating to lending which do notqualify for inclusion in the EIR on loans.

(f) Post-retirement benefitsThe Group operates a number of post-retirement benefit plans for its employees,including defined contribution plans, defined

benefit plans and other post-retirementbenefits (principally medical). The costs ofthese plans are charged to the IncomeStatement and retained earnings inaccordance with IAS 19 ‘Employee Benefits’.

A defined contribution plan is a pensionarrangement where the employer pays fixedcontributions into a separate fund. Thecontributions are charged to the IncomeStatement when employees have renderedthe related services, which is generally in theyear of contribution.

A defined benefit plan is a pensionarrangement that defines an amount ofpension benefit that an employee will receiveduring retirement, usually dependent on oneor more factors such as age, years of serviceand salary. The net deficit or surplus on theplan is carried in the Balance Sheet,comprising the present value of the definedbenefit obligation at the Balance Sheet dateless the fair value of plan assets. The definedbenefit obligation is calculated annually byindependent qualified actuaries using theprojected unit credit method. Details of theactuarial assumptions made are provided innote 28. Actuarial gains and losses arecharged to retained earnings in full in theperiod in which they occur, and pass throughthe Statement of Recognised Income andExpense rather than the Income Statement.The Company, being the sponsoring companyof the plans, carries on its Balance Sheet thenet deficit or surplus on each plan.

In accordance with IFRIC 14 ‘IAS 19 - The Limiton a Defined Benefit Asset, Minimum FundingRequirements and their Interaction’, if theGroup’s defined benefit plan has a netsurplus the surplus is capped at nil in theGroup and Company Balance Sheets becausethe Group and Company do not have a clearunconditional right to a refund or to areduction in contributions to the plan. Theposition is also adjusted to reflect anyminimum funding requirement that theCompany is obligated to pay.

Post-retirement medical benefits areaccounted for in the same way as pensionbenefits, with the present value of the definedbenefit obligation being carried as a liabilityon the Balance Sheet.

(g) Share-based paymentThe Group and Company operated variousshare-based incentive schemes foremployees and officers, including aSharesave Scheme. Grants of shares, shareoptions and other equity instruments wereaccounted for in accordance with IFRS 2‘Share-based Payment’, under which the fairvalue of awards is measured at the date ofgrant and charged to the Income Statementover the period to vesting, with acorresponding credit to retained earnings.Further details of the Group’s fair valuemethodology are given in note 34. The chargewas made only in respect of the number ofawards that were expected to vest; thisexpected number was revised at each

Balance Sheet date and any difference due toestimate revisions was charged or credited tothe Income Statement over the period tovesting with a corresponding adjustment toretained earnings. The proceeds received onexercise of options net of any directlyattributable transaction costs were credited toretained earnings.

In previous years the Group purchased someshares in the Company and held the sharesuntil they were needed to satisfy share-basedpayment commitments. The purchase cost,including transaction costs, of the shareswhich the Group still holds is deducted fromretained earnings.

(h) TaxationThe charge for taxation is based on the resultfor the year and takes into account taxationdeferred or accelerated arising fromtemporary differences between the carryingamounts of certain items for taxation and foraccounting purposes. Deferred taxation isprovided for in full at the tax rate which isexpected to apply to the period when thedeferred taxation is expected to be realised,including on tax losses carried forward, and isnot discounted to take account of theexpected timing of realisation. Deferredtaxation assets are recognised only to theextent that it is probable that future taxableprofits will be available against which thetaxable differences can be utilised. Taxrelating to items which are taken directly toreserves is also taken directly to reserves.

(i) DividendsIn accordance with IAS 10 ‘Events After theBalance Sheet Date’ dividends payable onordinary shares are recognised in retainedearnings once they are appropriatelyauthorised and are no longer at the discretionof the Company.

Dividends receivable (including thosereceivable from other Group entities) arerecognised once the right to receive paymentis established, in accordance with IAS 18‘Revenue’.

(j) Financial instrumentsIn accordance with IAS 39 ‘FinancialInstruments: Recognition and Measurement’each financial asset is classified at initialrecognition into one of four categories:

(i) Financial assets at fair value through profitor loss;

(ii) Held-to-maturity investments;(iii) Loans and receivables; or(iv) Available-for-sale;

and each financial liability into one of twocategories:(v) Financial liabilities at fair value through

profit or loss; or(vi) Other liabilities.

‘The Fair Value Option’ amendment to IAS 39permits designation of a financial asset orfinancial liability as being at fair value throughprofit or loss under wider circumstances than


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had previously been allowed. The Companyuses this amendment to prevent technicalaccounting mismatches between theCompany and other Group entities in respectof accounting for certain intra-Group swaparrangements; use of this amendment hashad no impact on the results or Balance Sheetof the Group.

Where the Directors believe it appropriate todo so, financial assets may be reclassified outof the ‘fair value through profit or loss’ and‘available-for-sale’ categories in accordancewith the revisions to IAS 39 issued by the IASBin October 2008 and effective from July 2008.In practice, no financial assets have beenreclassified out of the ‘fair value through profitor loss’ or ‘available-for-sale’ categories.

Measurement of financial instruments iseither at amortised cost (categories (ii), (iii)and (vi) above) or at fair value (categories (i),(iv) and (v) above), depending on the categoryof financial instrument.

Amortised cost is the amount measured atinitial recognition, adjusted for subsequentprincipal and other payments, less cumulativeamortisation calculated using the EIR method;the amortisation is taken to interest income orexpense depending on whether the instrumentis an asset or a liability. For assets, theamortised cost balance is reduced whereappropriate by an allowance for amounts whichare considered to be impaired or uncollectible.

Fair value is the amount for which an assetcould be exchanged, or a liability settled,between knowledgeable, willing parties in anarm’s length transaction. Where an activemarket exists, fair values are based onquoted market prices. For instruments whichdo not have active markets, fair value iscalculated using present value models, whichtake individual cash flows together withassumptions based on market conditions andcredit spreads, and are consistent withaccepted economic methodologies for pricingfinancial instruments. Interest income andinterest expense on instruments carried at fairvalue are included in the Income Statement in‘interest receivable and similar income’ or‘interest expense and similar charges’.Movements in fair value are recognised in the‘fair value movements’ line in the IncomeStatement, except in the case of instrumentscategorised as ‘available-for-sale’, in whichcase the fair value movements are taken tothe ‘available-for-sale’ reserve. On sale orderecognition of an ‘available-for-sale’instrument the accumulated fair valuemovements are transferred from the‘available-for-sale’ reserve to the ‘realisedgains less losses on financial instruments’ lineof the Income Statement.

Certain certificates of deposit, fixed andfloating rate notes and mortgage-backedsecurities are classified as available-for-sale.

In 2007 and 2008 the Group and Companyoperated a trading book; this ceased prior tothe end of 2008. The assets and liabilities in

the trading book were categorised as ‘at fairvalue through profit or loss’, and the nettrading gains and losses are included in theIncome Statement in ‘realised gains lesslosses on financial instruments’.

(k) Recognition and derecognition offinancial assetsPurchases and sales of mortgage portfoliosare accounted for on the completion date. Allother purchases and sales of financial assetsare accounted for on the date of commitmentto buy or sell (the ‘trade date’). The initialcarrying amount of an acquired mortgageportfolio is the purchase price; this isconsidered to be equivalent to the portfolio’sfair value at the point of purchase. Anydifference between this portfolio purchaseprice and the total amount outstanding on theacquired loans is amortised on an EIR basis inaccordance with paragraph 1(d). A financialasset is derecognised (i.e. removed from theBalance Sheet) only when substantially all ofthe risks and rewards associated with thatasset have been transferred to another partyand control is lost. In respect of the Company’ssecured funding structures, the Company sellsto another entity the right to receive the cashflows arising on the loans which have beensecuritised. However, the Company receivessubstantially all of the post-tax profit of thatentity, and hence retains substantially all of therisks and rewards of the securitised loans.Hence the securitised loans are retained onthe Company’s Balance Sheet.

(l) Impairment of financial assetsFinancial assets are reviewed for indicationsof possible impairment throughout the yearand at each published Balance Sheet date.

Loans and receivablesFor each individual loan which exhibitsindications of impairment (which includes allloans 12 or more months in arrears, those inpossession and others which managementconsider to be individually impaired) thecarrying value of the loan at the BalanceSheet date is reduced to the net present valueof the expected future cash flows associatedwith the loan, calculated at the loan’s originalEIR. These cash flows include, whereappropriate, estimated amounts recoverableby repossession and sale of the securedproperty, taking into account expectations ofmovements in house prices between theBalance Sheet date and the date of sale, andalso taking into account a discount onproperty value to reflect a forced sale. Allloans that have been assessed as having noindividual impairment are then assessedcollectively, grouped by loans with similar riskcharacteristics. Assessment is made ofimpairment arising due to events which arebelieved to have occurred by the BalanceSheet date but had not yet been reported,taking into account the economic climate inthe market. This collective impairment isreflected by reducing the carrying value oftotal loans. The impairment of the loans ischarged in the Income Statement in the ‘loanimpairment loss’ line.

Interest income is recognised on impairedloans by applying the original EIR of the loanto the impaired balance.

A loan is written off and any associatedimpairment allowance released when andonly when the property has been taken intopossession and sold. Any subsequentproceeds are recognised on a cash basis andoffset against ‘loan impairment loss’ in theIncome Statement.

Debt securities heldIn general, debt securities are carried at fairvalue net of impairment, as detailed inparagraph 1(m). Impairment is recognisedwhen the debt security exhibits objectiveevidence of impairment or is uncollectible.Evidence includes:• Significant financial difficulty;• Payment defaults;• Renegotiation of terms due to borrower

difficulty;• Sustained fall in credit rating;• Significant restructuring;• Disappearance of an active market;• Significant and sustained fall in market

price; and• Observable data indicating measurable

decrease in the estimated future cashflows from a group of financial assets,although the decrease cannot yet beidentified within individual assets in thegroup.

Movements in the fair value which are areflection of impairment of the long termvalue of the debt security are charged to‘investment impairment loss’ in the IncomeStatement. Investment impairment lossesrecognised against debt securities would bereversed in a subsequent period if theimprovement related to an event occurringafter the initial impairment was recognised.

(m) Debt securities heldIn general, debt securities intended for use ona continuing basis in the Group’s activities arecategorised as ‘available-for-sale’, andcarried at fair value, with movements in fairvalue being taken to the ‘available-for-sale’reserve. If a debt security which has beencategorised as ‘available-for-sale’ becomesimpaired, the impairment is charged to theIncome Statement in the ‘investmentimpairment loss’ line. Where the Directorsbelieve it appropriate to do so, debt securitiesmay be initially categorised as ‘loans andreceivables’, or may subsequently bereclassified out of the ‘available-for-sale’category to ‘loans and receivables’ inaccordance with the revisions to IAS 39 issuedby the IASB in October 2008 and effectivefrom July 2008. In practice, no debt securitieshave been reclassified out of the ‘available-for-sale’ category.At 31 December 2007, debt securitiesincluded investments in Structured InvestmentVehicles (‘SIVs’) Principal Protected Notes(‘PPNs’) and Collateralised Debt Obligations(‘CDOs’). The Group had no entitlement toboard or management representation inrespect of its investment in any SIV, PPN or

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CDO, and could not exert influence, andtherefore the instruments were considered tofall outside the scope of IAS 27 ‘Consolidatedand Separate Financial Statements’, IAS 28 ‘Investments in Associates’ and IAS 31‘Interests in Joint Ventures’.

(n) Derivative financial instruments andhedge accountingThe Group enters into derivative contracts inorder to manage exposures to interest raterisks, foreign currency risks and risks arisingfrom forecast transactions, in accordance withIAS 39. As explained in note 1(j), the Companyhas used the provisions of the Fair ValueOption amendment to IAS 39 to preventtechnical accounting mismatches in respect ofintra-Group swap arrangements.

All derivatives are carried at fair value in theBalance Sheet, as assets when the fair value ispositive and as liabilities when the fair value isnegative. The fair value of a derivative includesany interest accrued on that derivative. Changesin the fair value of derivatives are charged to theIncome Statement; however by applying thehedge accounting rules set out in IAS 39 thechanges in fair value of derivatives which areused to hedge particular risks can either bemitigated in the Income Statement (fair valuehedging) or deferred to reserves (cash flowhedging). The Group uses fair value hedgeaccounting and cash flow hedge accounting.

One-to-one fair value hedgesWhere one or more specific derivativefinancial instruments hedge the changes infair value of a specific asset or liability,provided that the hedge arrangement meetsthe requirements of IAS 39 to be classed as‘highly effective’ the associated hedged itemis carried in the Balance Sheet at fair value inrespect of the hedged risk, with any gain orloss in that fair value recognised in the IncomeStatement, mitigating the fair valuemovements on the associated derivativefinancial instruments. Hence profit volatility ismitigated. The Income Statement immediatelyrecognises any hedge accounting‘ineffectiveness’, that is any differencebetween the fair value movement on thehedging instrument and that on the hedgeditem. Where a fair value hedge relationship isterminated or deemed not to be highlyeffective (other than as a result of the hedgeditem being derecognised from the BalanceSheet due to sale or other reason) the fairvalue adjustment relating to the terminatedhedge relationship is amortised to the IncomeStatement over the period to the date ofmaturity of the hedged item. The derivativecontinues to be carried at fair value.

Portfolio fair value hedgesWhere a group of derivative financialinstruments hedges the interest rate exposureof a group of assets or liabilities, and thehedge meets the requirements of IAS 39 to beclassed as ‘highly effective’, the hedgerelationship is accounted for in the same wayas a one-to-one fair value hedge except thatthe Balance Sheet carrying value of thehedged items is not adjusted; instead the

difference between the carrying value andthe fair value in respect of the hedged risk iscarried on the Balance Sheet in ‘fair valueadjustments on portfolio hedging’.

Cash flow hedges Where a derivative financial instrumenthedges the variability in cash flows of an assetor liability, or of a highly probable forecasttransaction, the effective portion of the changein fair value of the derivative is taken to the‘cash flow hedge reserve’ and the remainingportion is charged immediately to the IncomeStatement. Where a cash flow hedge isterminated or deemed not to be effective, thebalance remaining in the cash flow hedgereserve is amortised to the Income Statementover the remaining life of the hedged item.Where a forecast transaction is cash flowhedged and the transaction is no longer highlyprobable, the gain or loss still held in thereserve is immediately recognised in theIncome Statement.

Hedge effectivenessAt the inception of each hedgingarrangement, the relationship between thehedging instruments and the hedged items isdocumented, as well as the risk managementobjective and strategy. Also documented is anassessment, both at hedge inception and onan ongoing basis, of whether the derivativesthat are used in the hedging arrangement arehighly effective in offsetting changes in fairvalues or cash flows of the hedged items.

Under IAS 39 a hedge is deemed to be highlyeffective if effectiveness is forecast to fall, andis actually found to fall, within the 80% to125% range. Any hedge relationship fallingoutside these limits is deemed to beineffective and hedge accounting isdiscontinued.

Embedded derivativesCertain financial instruments have derivativefeatures embedded within them. Where theeconomic characteristics and risks of theembedded derivative are not closely related tothose of the host instrument, and wherechanges in value in the host instrument are notreflected in the Income Statement, the embedded derivative is separated from thehost and carried in the Balance Sheet at fairvalue within ‘derivative financial instruments’,with gains and losses on the embeddedderivative being recognised in the IncomeStatement. At 31 December 2007 the Groupheld some synthetic CDOs which containedembedded derivatives, and consequently thefair value of the credit derivative contract wasseparated from the host synthetic CDO andcarried on the Balance Sheet at fair valuewithin ‘derivative financial instruments’, withchanges in its fair value recognised in theIncome Statement. In accordance with IFRIC 9‘Reassessment of Embedded Derivatives’ thedecision as to whether to separate and valuean embedded derivative is reassessed whenand only when the terms of the host contractare significantly modified.

(o) Shares in Group undertakingsIn the Financial Statements of the Company,shares in Group undertakings are carried atcost less any impairment. Shares arereviewed at each published Balance Sheetdate for any indications of impairment. If thereis indication of impairment of any share, thecarrying value of the share is reviewed, andany impairment identified is chargedimmediately in the Income Statement.

(p) Property, plant and equipment The cost of additions and major alterations toland and buildings, equipment, fixtures andmotor vehicles is capitalised. All property,plant and equipment is stated at historicalcost less depreciation.

Depreciation is provided so as to write off thecost less the estimated residual value of eachsignificant component of each item ofproperty, plant and equipment over thatcomponent’s estimated useful life, as follows:

• Land is not depreciated;• Freehold buildings at 2% per annum on a

straight line basis;• Leasehold properties over the shorter of the

lease period and 50 years on a straight linebasis;

• Fixtures and fittings at 20% per annum on astraight line basis;

• Motor vehicles at 25% per annum on areducing balance basis;

• Computer equipment at rates ranging from20% to 33% per annum on a straight linebasis; and

• Other equipment and major alterations tobuildings at 10% per annum on a straightline basis.

All items of property, plant and equipment arereviewed annually for impairment. If any itemis considered to be impaired, it is writtendown to the higher of value in use andestimated net proceeds of sale. In addition,the estimated useful lives and estimatedresidual values are also reassessed annually,and if they are judged to have changed thenthe rate of depreciation charged in periodsafter the date of the change reflects therevised estimates.

(q) LeasesRentals under operating leases are chargedto ‘administrative expenses’ on a straight linebasis to the date of change in the rentalamount. Typically operating leases have rentreview dates in their terms, several yearsapart, and between those dates the annualrent remains constant. Any initial rent-freeperiod and any lease premia paid areamortised over the full lease period on astraight line basis.

When the Group enters into a sale andleaseback arrangement, the leaseback isaccounted for as a finance lease or anoperating lease, according to its terms. If it is afinance lease, and the sale and leasebackgives rise to a profit, the profit is notrecognised immediately but is deferred andamortised over the lease term. If it is an


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operating lease, any profit or loss isaccounted for in the period of disposal.

(r) Intangible assetsComputer software licences are capitalised asintangible assets where it is probable thatexpected future benefits will flow to theGroup. Thereafter they are carried at cost lessaccumulated amortisation. Amortisation isprovided on a straight line basis over theiruseful economic lives, which may be up to fiveyears. Those which have a life expectancy atthe outset of less than two years are notcapitalised but instead their costs are chargedto the Income Statement as they arise. Coststhat are directly associated with developingidentifiable computer software systems arecapitalised if the criteria in IAS 38 ‘IntangibleAssets’ are satisfied; the main criteria are thatthe successful completion of the developmentproject is reasonably certain and that thesoftware is expected to generate futureeconomic benefits. Each item of capitaliseddeveloped computer software is carried atcost less accumulated amortisation;amortisation is provided on a straight linebasis over its estimated useful life. Costs thatdo not qualify for capitalisation are charged tothe Income Statement as they arise.All items of intangible assets are reviewedannually for impairment. If any item isconsidered to be impaired, it is written downto the impaired value. In addition, theestimated useful lives are also reassessedannually, and if they are judged to havechanged then the rate of amortisationcharged in periods after the date of thechange reflects the revised estimates.

(s) Debt and equity securities in issueIssued securities are classed as liabilities ifthey represent a contractual obligation todeliver cash or another financial asset toanother entity. Otherwise they are classed asequity. Any coupon paid on liabilities isaccounted for as interest expense on an EIRbasis and any coupon on equity as dividends.

On initial recognition, debt issued is measuredat its fair value net of directly attributable issueand transaction costs. Subsequentmeasurement is at amortised cost using theEIR method to amortise attributable issue andtransaction costs, premia and discounts overthe life of the instrument. These costs arecharged along with interest on the debt to‘interest expense and similar charges’.Unamortised amounts are added to ordeducted from the carrying value of theinstrument.

It is the Group’s policy to hedge fixed interestrate risk on debt issued and to apply fair valuehedge accounting.

(t) ProvisionsProvisions are recognised when, and onlywhen, the following criteria are all met:

• there is a present obligation (legal orconstructive) as a result of a past event;

• it is probable that an outflow of resourceswill be required to settle the obligation; and

• a reliable estimate can be made of theamount of the obligation.

Provisions are discounted to net present valueusing rates which reflect the risks specific tothe provision, if the effect of discounting ismaterial.

Provisions are reviewed at each BalanceSheet date and are released if they no longermeet the above criteria.

(u) Cash and cash equivalentsFor the purposes of the Cash Flow Statement,cash and cash equivalents comprise ofbalances which are highly liquid and have anoriginal maturity of three months or less.

(v) Foreign currenciesThe presentational and functional currency ofthe Group and Company is pounds sterling.Transactions which are not denominated inpounds sterling are translated into sterling atthe spot rate of exchange on the date of thetransaction. Monetary assets and liabilitieswhich are not denominated in pounds sterlingare translated into sterling at the closing rateof exchange at the Balance Sheet date.

Any foreign exchange gains or losses arisingfrom settlement of transactions at ratesdifferent from those at the date of thetransaction, and any unrealised foreigncurrency exchange gains and losses onunsettled foreign currency monetary assetsand liabilities, are included in the IncomeStatement.

(w) Financial guaranteesThe Company applies insurance accounting tofinancial guarantee contracts, and providesagainst any claims arising under such contracts.

(x) Loan commitmentsLoan commitments are disclosed, but areaccounted for only if there is an onerouscommitment; there were no onerous loancommitments in the year or previous year. Thecommitment ceases to be disclosed once it isadvanced or expires. Loan commitmentscomprise commitments to advance cashsums and also, in respect of lifetimemortgages, the commitment to continue toaccrue further interest on the loan. Theinterest on lifetime mortgages rolls up and isnot payable until redemption of the loan. Fordisclosure purposes, an estimate is made ofthe future interest which is expected to accrueon the lifetime mortgages which wereoutstanding as at the Balance Sheet date, upto redemption of these loans. This estimate ismade using actuarial assumptions obtainedfrom independent actuaries.

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2. Gain/(loss) on sale of assets and liabilities2008

£m

Consideration on sale of savings related assets and liabilities 612.0Book value of assets transferred (264.1)Impairment of assets retained (see notes 19 and 20) (72.7)Gain on curtailment of post-retirement benefit obligations (see note 28) 23.1Net transaction and restructuring costs (82.0)Gain on sale of savings related assets and liabilities 216.3On 29 September 2008 the Chancellor of the Exchequer announced that by The Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008 (‘the Transfer Order’)under the Banking (Special Provisions) Act 2008, the shares of the Company were transferred to the Treasury Solicitor as nominee for HM Treasury and the Group’s UK and Isle ofMan savings related assets and liabilities along with its branch network had been transferred to Abbey. These transactions are referred to in this document as the Transfer. Thenet transaction and restructuring costs noted in the table include redundancy and other expenses incurred as a result of the Transfer.

2007 2007Commercial Housing 2007

properties associations Total£m £m £m

Net proceeds from sale 1,890.0 2,064.0 3,954.0Book value of assets sold (1,972.1) (2,026.6) (3,998.7)

(82.1) 37.4 (44.7)

less costs (13.3)Loss on sale of assets (58.0)In April 2007, the Board took the strategic decision to sell the Group’s commercial property and housing association mortgage portfolios. The sale realised £4.0bn.

3. Net interest incomeGroup

2008 2007£m £m

Net interest income 737.4 547.7Average interest-earning assets (‘IEA’) 50,433 49,743Financed by

- Interest-bearing liabilities 43,603 47,904- Interest-free liabilities 6,830 1,839

Average rates % %- Gross yield on IEA 6.19 5.96- Cost of interest-bearing liabilities (5.61) (5.05)

Interest spread 0.58 0.91Contribution of interest-free liabilities 0.88 0.19Net interest margin 1.46 1.10Average bank base rate 4.68 5.51Average 3-month LIBOR 5.51 6.00Average 3-year swap rate 5.03 5.81

Included within interest receivable and similar income are the following amounts:Group

2008 2007£m £m

Interest accrued on impaired financial assets 17.6 3.7



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4. Administrative expensesGroup

2008 2007£m £m

Staff costs (see note 5) 85.7 105.7Property operating lease rentals 6.9 7.7Depreciation and amortisation (see notes 19 and 20) 19.3 23.7Other legal and professional services 29.3 26.6IT costs 42.1 42.6Other administrative expenses 69.9 73.9Ongoing administrative expenses 253.2 280.2Restructuring costs 11.7 -Contract termination fees 32.0 -Compensation provision release (20.0) -Other net expenses 23.7 -

276.9 280.2Staff costs include Directors’ emoluments of £4.3m (2007: £3.6m). Details of the remuneration of the highest paid director are shown in the Directors’ Remuneration Report onpages 23 to 29.Restructuring costs include redundancy and other costs associated with the closure of the Group’s mortgage servicing operations in North London and other mortgage salesactivities announced on 25 September 2008.Contact termination fees are costs payable as a result of terminating agreements for the future purchase of mortgages, thus limiting the Group’s funding and cash flowrequirements, as described in note 11.During the period the rate of compensation claims fell and the level of provision remaining was reassessed. Consequently £20.0m of the provision was released.

Group2008 2007

£m £m

Remuneration of auditor and associates- Statutory audit of the Company and consolidated accounts 0.5 0.5

Fees payable to the Group’s auditor and its associates for other services:- Auditing of the Company’s subsidiary undertakings 0.1 0.1- Other services pursuant to legislation 1.1 0.1- Other services relating to taxation 0.2 -- Regulatory and other services 0.6 0.7

Total 2.5 1.4

5. Staff costs and numbersThe average number of persons employed during the year was as follows:

Full time Part time Full time equivalent2008 2007 2008 2007 2008 2007

Number Number Number Number Number Number

Group average 2,070 2,451 566 691 2,420 2,862Company average 1,469 1,811 424 534 1,726 2,246

The full time equivalent is based on the average hours worked by employees in the year. The total full time equivalent headcount at each year end was:Full time Part time Full time equivalent

2008 2007 2008 2007 2008 2007Number Number Number Number Number Number

Group 838 2,760 157 468 942 2,910Company 451 2,188 65 371 495 2,225

The aggregate costs of these persons were as follows:Group

2008 2007£m £m

Wages and salaries 75.7 87.4Social security costs 8.3 8.7Defined benefit pension costs (see note 28) 1.7 3.0Defined contribution pension costs (see note 28) 1.7 1.4Other post-retirement benefits costs (see note 28) 0.7 0.6Equity-settled share-based payment (see note 34) (2.4) 4.6

85.7 105.7

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6. TaxationGroup

2008 2007£m £m

Current taxation expense- UK corporation tax on profit for the financial year 103.6 6.1- Adjustments in respect of previous years (14.4) 7.3

89.2 13.4Foreign taxation 29.9 22.1Total current taxation 119.1 35.5Deferred taxation expense

- Origination and reversal of temporary differences (see note 18) (3.0) (3.4)- Change in rate effective 1 April 2008 on deferred tax items - 0.7

Total taxation expense per the Income Statement 116.1 32.8The following current tax was recognised directly in equity during the year

- Relating to available-for-sale debt securities 92.6 25.9The following tax was recognised in equity during the year in deferred tax

- Relating to cash flow hedge reserve 34.3 32.3- Relating to available-for-sale debt securities (157.0) -- Relating to actuarial losses/(gains) on post-retirement benefit obligations 5.0 (15.4)- Relating to share-based payments - (1.5)

Net (charge)/credit to equity (25.1) 41.3The 2008 foreign taxation charge includes a charge of £nil (2007: £nil) in respect of previous years.The prior year credit of £14.4m primarily relates to the agreement of a number of returns in the year which have resulted in the Group being able to release approximately£15.0m from the current tax creditor.

The total taxation expense differs from the theoretical amount that would be derived by applying the weighted standard UK corporation tax rateto the Group’s results as follows:

Group2008 2007

£m £m

Profit before taxation 134.3 126.0UK corporation tax at 28.5%/30% 38.3 37.8Effects of

- Expenses not deductible for taxation 17.0 4.3- Deferred tax not recognised 77.3 -- Effect of overseas tax rates 0.2 (7.2)- Change in rate effective 1 April 2008 on deferred tax items (1.8) (0.7)- Adjustments in respect of previous years (14.9) (1.4)

Total taxation charge for the year 116.1 32.8Effective tax rate (%) 86.4 26.0Deferred tax appropriately reflects the change to the standard rate of UK corporation tax from 30% to 28% which became effective on 1 April 2008.The weighted standard rate of UK corporation tax for 2008 was 28.5%.

7. DividendsGroup and Company dividends recognised in the year were as follows:

2008 2007 2008 2007Pence per share Pence per share £m £m

2006 final dividend - 13.4 - 84.72007 interim dividend - 6.7 - 41.82007 final dividend 14.3 - 87.9 -

14.3 20.1 87.9 126.5Proposed final dividend (unaccrued) - 14.3 - 87.9A 2007 final dividend of 14.3 pence per share was paid on 2 May 2008 to shareholders on the register at the close of business on 25 March 2008.The Directors do not recommend the payment of a final dividend (2007: £87.9m). In accordance with IAS 10 ‘Events after the Balance Sheet Date’ the 2007 proposed finaldividend was not accrued at 31 December 2007 as it was not a liability at that date.


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8. Loans and advances to banksGroup Company

2008 2007 2008 2007£m £m £m £m

Items in the course of collection from other banks 16.1 82.9 16.1 79.1Amounts due from banks 3,333.1 2,309.2 1,364.7 1,822.8Total 3,349.2 2,392.1 1,380.8 1,901.9

9. Loans and advances to customersGroup Company

2008 2007 2008 2007£m £m £m £m

Net of impairment (see note 10)- Advances secured on residential properties 40,988.8 39,565.0 31,583.7 24,566.3- Other secured advances 837.2 879.5 837.2 879.5- Amounts due from subsidiary undertakings - - 26,201.2 25,989.6

41,826.0 40,444.5 58,622.1 51,435.4Loans and advances to customers include advances secured on residential properties that are securitised amounting to £16,221.2m (2007: £20,810.5m) for Group and£16,221.2m (2007: £20,454.1m) for Company which have been sold to bankruptcy remote special purpose vehicles whereby some of the risks and rewards of the portfolio areretained by the Group/Company. Accordingly all these loans and advances are retained on the Group’s/Company’s Balance Sheets. Further details are provided in note 12.

Loans and advances to customers comprise the following product types:Group Balances Balances

At 31 December 2008 At 31 December 2007£m % £m %

ResidentialLoans advanced to customers by the Group

- Buy-to-let 22,198.8 68 20,960.8 67- Self-cert 5,381.6 17 5,491.9 17- Standard and other specialist 4,769.3 15 4,959.6 16

Total 32,349.7 100 31,412.3 100Loans acquired from other lenders

- Buy-to-let 2,690.3 31 2,172.1 27- Self-cert 3,335.1 39 3,048.2 38- Standard and other specialist 2,592.2 30 2,789.7 35

Total 8,617.6 100 8,010.0 100- Buy-to-let 24,889.1 61 23,132.9 59- Self-cert 8,716.7 21 8,540.1 22- Standard and other specialist 7,361.5 18 7,749.3 19

Total residential 40,967.3 100 39,422.3 100Residential 40,967.3 98 39,422.3 97Commercial property 837.2 2 879.5 3Housing associations 21.5 - 142.7 -Total 41,826.0 100 40,444.5 100

Company Balances BalancesAt 31 December 2008 At 31 December 2007

£m % £m %

Residential- Buy-to-let 19,906.0 63 16,765.1 69- Self-cert 6,773.2 22 4,185.3 17- Standard and other specialist 4,883.0 15 3,473.2 14

Total 31,562.2 100 24,423.6 100- Residential 31,562.2 54 24,423.6 47- Commercial property 837.2 1 879.5 2- Housing associations 21.5 - 142.7 -- Group undertakings 26,201.2 45 25,989.6 51

Total 58,622.1 100 51,435.4 100

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10. Loan impairment lossGroup

On commercial propertyOn residential mortgages and housing associations Total

2008 £m £m £m

Allowances for credit losses against loans and advances to customers have been made as follows:Opening provision at 1 January 2008 54.8 0.1 54.9Write-offs (65.5) - (65.5)Loan impairment charge 480.9 30.6 511.5Discount unwind (2.5) - (2.5)Net movements during the year 412.9 30.6 443.5Closing provision at 31 December 2008 467.7 30.7 498.4The Income Statement charge comprised

- Loan impairment charge 480.9 30.6 511.5- Recoveries (1.3) - (1.3)- Discount unwind (2.5) - (2.5)

Total Income Statement charge 477.1 30.6 507.7

2007

Allowances for credit losses against loans and advances to customers have been made as follows:Opening provision at 1 January 2007 47.8 1.6 49.4Write-offs (23.8) - (23.8)Loan impairment charge/(credit) 30.4 (1.5) 28.9Discount unwind 0.4 - 0.4 Net movements during the year 7.0 (1.5) 5.5Closing provision at 31 December 2007 54.8 0.1 54.9The Income Statement charge/(credit) comprised

- Loan impairment charge/(credit) 30.4 (1.5) 28.9- Recoveries (6.8) - (6.8)- Discount unwind 0.4 - 0.4

Total Income Statement charge/(credit) 24.0 (1.5) 22.5

CompanyOn commercial property

On residential mortgages and housing associations Total2008 £m £m £m

Allowances for credit losses against loans and advances to customers have been made as follows:Opening provision at 1 January 2008 15.6 0.1 15.7Write-offs (12.2) - (12.2)Loan impairment charge 237.9 30.6 268.5Net movements during the year 225.7 30.6 256.3Closing provision at 31 December 2008 241.3 30.7 272.0The Income Statement charge comprised

- Loan impairment charge 237.9 30.6 268.5- Recoveries (1.2) - (1.2)

Total Income Statement charge 236.7 30.6 267.3

2007

Allowances for credit losses against loans and advances to customers have been made as follows:Opening provision at 1 January 2007 11.4 1.6 13.0Write-offs (1.8) - (1.8)Loan Impairment charge/(credit) 6.0 (1.5) 4.5Net movements during the year 4.2 (1.5) 2.7Closing provision at 31 December 2007 15.6 0.1 15.7The Income Statement charge/(credit) comprised

- Loan impairment charge/(credit) 6.0 (1.5) 4.5- Recoveries (4.5) - (4.5)

Total Income Statement charge/(credit) 1.5 (1.5) -In the Balance Sheet these impairment allowances are deducted from the carrying values of the impaired assets.


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10. Loan impairment loss continuedIn respect of loans and advances to customers, the Group and Company hold collateral in the form of mortgages over residential properties. Thefair value of this collateral was as follows:

Group Company2008 2007 2008 2007

£m £m £m £m

Neither past due nor impaired 53,156.6 70,423.3 45,303.1 48,940.8Past due but not impaired 3,964.8 3,278.5 2,519.6 1,650.5Individually impaired 911.2 195.1 316.8 60.3

58,032.6 73,896.9 48,139.5 50,651.6

If the collateral amount on each individual loan were capped at the amount of the balance outstanding, and any surplus of collateral values overbalances outstanding ignored, the fair value of collateral held would be as follows:

Group Company2008 2007 2008 2007

£m £m £m £m

Neither past due nor impaired 36,001.8 37,212.7 28,679.1 23,444.9Past due but not impaired 3,415.7 2,107.8 2,036.3 901.5Individually impaired 804.0 146.5 292.8 40.9

40,221.5 39,467.0 31,008.2 24,387.3The individually impaired balances above include the following carrying amount of assets in possession, capped at the balance outstanding 61.7 88.1 16.6 21.5The fair value of the collateral is estimated by taking the most recent valuation of the property and adjusting for positive or negative house price inflation.

Indexed average loan to value (LTV)

Group Company2008 2007 2008 2007

% % % %

Neither past due nor impaired 69.7 52.8 64.9 47.9Past due but not impaired 88.9 64.3 82.7 54.6Individually impaired 93.1 79.6 95.7 71.6Total book 71.4 55.3 66.1 50.3After a property has been taken into possession, the process for sale is designed to mitigate any loss or maximise any potential surplus for the borrower.Typically the property is sold by private treaty, via a locally appointed agent, as quickly as possible and for the best price attainable, taking into consideration market, property andgeneral economic conditions. If it becomes apparent that the property will not sell by private treaty, consideration is given to submitting the property to an auction, following anauction appraisal and a recommendation by the Company’s appointed Asset Manager.During 2008, the number of cases three months or more in arrears has increased significantly to 17,355 cases at 31 December 2008 from 6,170 cases at 31 December 2007. Inpercentage terms, these numbers equate to 4.60% of the mortgage book compared to 1.63%. The corresponding value of arrears has increased from £828.2m to £2,514.1m. The combination of a economic recession, increasing arrears, house price deflation of c.16% in 2008 and negative forecasts for 2009, and additional fraud provisioning, hasdramatically increased the impairment charge and Balance Sheet provisions during 2008.

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10. Loan impairment loss continuedFurther information regarding the credit quality of loans and advances to customers:Group At 31 December 2008 At 31 December 2007

On Oncommercial commercial

On property On propertyresidential and housing residential and housingmortgages associations Total mortgages associations Total

£m £m £m £m £m £m

Neither past due nor impaired 37,089.5 609.5 37,699.0 37,212.7 1,022.3 38,235.0Past due but not impaired

- up to 3 months 1,831.5 - 1,831.5 1,436.2 - 1,436.2- 3 to 6 months 917.3 - 917.3 464.6 - 464.6- 6 to 12 months 777.7 - 777.7 208.2 - 208.2

Individually impaired 819.0 279.9 1,098.9 155.4 - 155.441,435.0 889.4 42,324.4 39,477.1 1,022.3 40,499.4

Impairment allowances (467.7) (30.7) (498.4) (54.8) (0.1) (54.9)Loans and advances to customers net of impairment allowances 40.967.3 858.7 41,826.0 39,422.3 1,022.2 40,444.5Impairment allowances

- individual 196.6 30.6 227.2 20.0 - 20.0- collective 271.1 0.1 271.2 34.8 0.1 34.9

Total 467.7 30.7 498.4 54.8 0.1 54.9

Company At 31 December 2008 At 31 December 2007On On

commercial commercialOn property On property

residential and housing residential and housingmortgages associations Total mortgages associations Total

£m £m £m £m £m £m

Neither past due nor impaired 29,417.2 609.5 30,026.7 23,494.2 1,022.3 24,516.5Past due but not impaired

- up to 3 months 1,239.6 - 1,239.6 677.1 - 677.1- 3 to 6 months 518.5 - 518.5 158.4 - 158.4- 6 to 12 months 325.0 - 325.0 66.3 - 66.3

Individually impaired 303.2 279.9 583.1 43.2 - 43.231,803.5 889.4 32,692.9 24,439.2 1,022.3 25,461.5

Impairment allowances (241.3) (30.7) (272.0) (15.6) (0.1) (15.7)Loans and advances to customers net of impairment allowances 31,562.2 858.7 32,420.9 24,423.6 1,022.2 25,445.8Impairment allowances

- individual 81.2 30.6 111.8 5.0 - 5.0- collective 160.1 0.1 160.2 10.6 0.1 10.7

Total 241.3 30.7 272.0 15.6 0.1 15.7No loans which would otherwise be presented as past due or impaired are excluded from those amounts presented above as a result of renegotiation.


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10. Loan impairment loss continuedArrears and possessions are monitored for the Group as a whole, and also split by type of product, and split between the loans which the Grouporiginally advanced to customers and the loans which the Group acquired from other lenders.Arrears and possessions - total Group At 31 December 2008 At 31 December 2007

ArrearsOver 3 months

Number of cases Number 16,712 5,610Proportion of total % 4.43 1.48Asset value £m 2,404.0 731.2Proportion of book % 5.87 1.85

PossessionsNumber of cases Number 643 560Proportion of total % 0.17 0.15Asset value £m 110.1 97.0Proportion of book % 0.27 0.25

Total arrears and possessionsNumber of cases Number 17,355 6,170Proportion of total % 4.60 1.63Asset value £m 2,514.1 828.2Proportion of book % 6.14 2.10Value of arrears and possessions £m 112.5 49.0Proportion of total book % 0.27 0.12

Residential loan impairment balanceAs % of residential balances % 1.13 0.14As % of residential arrears and possessions % 18.60 6.62

Analysis of accounts 3+ months in arrears by product At 31 December 2008 At 31 December 2007

ArrearsBuy-to-let


Self-certNumber of cases Number 3,370 1,433Proportion of total % 6.09 2.59Asset value £m 584.7 233.9Proportion of book % 6.71 2.74

OtherNumber of cases Number 3,831 2,182Proportion of total % 3.23 1.65Asset value £m 397.6 197.4Proportion of book % 5.40 2.55

Analysis of accounts 3+ months in arrears: loans advanced to customers by the Group At 31 December 2008 At 31 December 2007

ArrearsTotal


Buy-to-letNumber of cases Number 7,931 1,621Proportion of total % 4.36 0.93Asset value £m 1,190.4 242.3Proportion of book % 5.36 1.16

Self-certNumber of cases Number 1,715 834Proportion of total % 5.05 2.37Asset value £m 299.2 135.4Proportion of book % 5.56 2.47

OtherNumber of cases Number 2,069 1,383Proportion of total % 2.06 1.23Asset value £m 116.3 74.3Proportion of book % 2.43 1.50

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10. Loan impairment loss continuedArrears and possessions continuedAnalysis of accounts 3+ months in arrears: loans acquired from other lenders At 31 December 2008 At 31 December 2007

ArrearsTotal

Number of cases Number 4,997 1,772Proportion of total % 8.23 3.03Asset value £m 798.1 279.2Proportion of book % 9.26 3.49

Buy-to-letNumber of cases Number 1,580 374Proportion of total % 7.44 2.06Asset value £m 231.3 57.6Proportion of book % 8.60 2.65

Self-certNumber of cases Number 1,655 599Proportion of total % 7.75 2.98Asset value £m 285.5 98.5Proportion of book % 8.56 3.23

OtherNumber of cases Number 1,762 799Proportion of total % 9.75 3.96Asset value £m 281.3 123.1Proportion of book % 10.85 4.41

11. Acquisitions of mortgage portfoliosDuring the year the Group acquired £1,302.1m (2007: £3,495.1m) of mortgage portfolios from GMAC-RFC Limited (‘GMAC’) and £550.4m (2007:£648.4m) from Kensington Mortgage Company Limited (‘Kensington’) under contractual agreements for the purchase of mortgage portfolios.During the year, the Group renegotiated contractual agreements to reduce significantly the value of further mortgage loans the Group iscommitted to purchasing. As a result of these negotiations, contract termination fees totalling £32.0m were payable.At 31 December 2008, the Group's remaining purchase commitments were no more than £250.0m from GMAC and £60.0m from Kensington.On 30 January 2009 the Group purchased £39.5m of mortgages from Kensington. On 27 February 2009 the Group purchased £248.7m ofmortgages from GMAC, extinguishing any commitment to buy any further mortgages from GMAC.

12. Securitised assets and secured fundingGroupAt 31 December 2008 Securitised Loan notes

Date of assets in issuetransaction £m £m

SecuritisationsAire Valley Mortgages 2004-1 plc* October 2004 807.7 638.3Aire Valley Mortgages 2005-1 plc* April 2005 631.4 499.0Aire Valley Mortgages 2006-1 plc* August 2006 3,074.9 2,430.1Aire Valley Mortgages 2007-1 plc* May 2007 3,157.1 2,495.1Aire Valley Mortgages 2007-2 plc* November 2007 1,240.6 980.5Bradford & Bingley Warehousing No. 1 LLP* June 2008 1,667.9 914.8Aire Valley Mortgages 2008-1 plc* July 2008 3,669.4 2,900.0Bowler Finance plc* July 2008 4,235.6 4,232.8

18,484.6 15,090.6Less loan notes held by Bradford & Bingley plc (9,503.1) (8,324.7)Total 8,981.5 6,765.9


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12. Securitised assets and secured funding continuedGroupAt 31 December 2008 Securitised Loan notes


Covered BondsBradford & Bingley Covered Bonds LLP* May 2004 1,720.8 1,342.0Bradford & Bingley Covered Bonds LLP* May 2006 2,620.1 2,043.4Bradford & Bingley Covered Bonds LLP* June 2006 294.0 229.3Bradford & Bingley Covered Bonds LLP* October 2006 433.1 337.8Bradford & Bingley Covered Bonds LLP* June 2007 1,893.9 1,477.0Bradford & Bingley Covered Bonds LLP* July 2007 188.4 146.9Bradford & Bingley Covered Bonds LLP* September 2007 641.1 500.0Bradford & Bingley Covered Bonds LLP* October 2007 89.4 69.7Bradford & Bingley Covered Bonds LLP* January 2008 641.1 500.0Bradford & Bingley Covered Bonds LLP* September 2008 2,491.4 1,943.0

11,013.3 8,589.1Less covered bonds held by Bradford & Bingley plc (3,773.6) (2,943.0)Total 7,239.7 5,646.1Total 16,221.2 12,412.0

GroupAt 31 December 2007 Securitised Loan notes


SecuritisationsAire Valley Finance (No.2) plc October 2000 356.4 333.6Aire Valley Mortgages 2004-1 plc* October 2004 1,018.9 775.0Aire Valley Mortgages 2005-1 plc* April 2005 1,028.5 782.3Aire Valley Mortgages 2006-1 plc* August 2006 3,194.8 2,430.1Aire Valley Warehousing 3 Ltd* December 2006 1,314.7 1,000.0Aire Valley Mortgages 2007-1 plc* May 2007 3,280.3 2,495.1Aire Valley Mortgages 2007-2 plc* November 2007 1,520.2 1,156.3

11,713.8 8,972.4Less loan notes held by Bradford & Bingley plc (959.6) (737.5)Total 10,754.2 8,234.9

Covered BondsBradford & Bingley Covered Bonds LLP* May 2004 2,129.2 1,342.0Bradford & Bingley Covered Bonds LLP* May 2006 3,303.5 2,082.1Bradford & Bingley Covered Bonds LLP* June 2006 374.5 236.0Bradford & Bingley Covered Bonds LLP* October 2006 621.6 391.8Bradford & Bingley Covered Bonds LLP* June 2007 2,676.5 1,686.9Bradford & Bingley Covered Bonds LLP* July 2007 285.1 179.7Bradford & Bingley Covered Bonds LLP* September 2007 793.4 500.0Bradford & Bingley Covered Bonds LLP* October 2007 665.9 419.7

10,849.7 6,838.2Less covered bonds held by Group entities (793.4) (500.0)Total 10,056.3 6,338.2Total 20,810.5 14,573.1*The Company held £16,221.2m of mortgage assets as at 31 December 2008 (2007: £20,454.1m) within loans and advances to customers to secure funding of £12,412.0m(2007: £14,239.5m). The secured funding amounts above are the principal amounts calculated using the exchange rates at the date of issue. The carrying amount of thissecured funding, including the hedge adjustments for hedged risk, is included in debt securities in issue (see note 25).During the year the Group securitised £12,705.4m of mortgage assets under certain securitisation programmes and purchased loan notes in issue relating to these issuances of£9,575.8m.2007 figures for securitised assets have been represented so as not to cap the amount at the level of secured funding obtained from the loan notes in issue.

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12. Securitised assets and secured funding continuedA ‘special purpose vehicle’ (‘SPV’) is a structure comprising one or more legal entities, set up to act as a trust for debt investors, with the aim ofobtaining financing. A Group company sells to another entity the right to receive the cash flows arising on certain loans. However, the mortgageoriginator receives substantially all of the post-tax profit of that entity, and hence retains substantially all of the risks and rewards of the securitisedloans. Hence the securitised loans are retained on the mortgage originator’s Balance Sheet. For the same reason all SPVs to which the Group hastransferred rights to mortgages are consolidated into the Group Financial Statements.

(a) Aire Valley Finance (No.2) plcThis SPV issued £1,000.0m of loan notes in October 2000 to purchase a £1,000.0m interest in mortgages. A start-up loan of £22.9m in the formof subordinated debt was provided by Bradford & Bingley plc. The last of the notes were redeemed in full on 15 September 2008. Securitisedassets at 31 December 2008 were £nil (2007: £356.4m), loan notes £nil (2007: £333.6m) and subordinated debt £nil (2007: £22.9m).

(b) Aire Valley Mortgages 2004-1 plcThis SPV issued £2,000.0m of loan notes denominated in US Dollars, Euros and Sterling in October 2004 to purchase a £2,000.0m share in theMaster Trust. £225.0m of loan notes were redeemed in September 2005, £500.0m in June 2007, £500.0m in December 2007, £96.0m in March2008 and £40.7m in June 2008. At 31 December 2008 the value of the share in the Master Trust was £638.3m (2007: £775.0m).

(c) Aire Valley Mortgages 2005-1 plcThis SPV issued £998.5m of loan notes denominated in US Dollars, Euros and Sterling in April 2005 to purchase a £998.5m share in the MasterTrust. £216.2m of loan noted were redeemed in December 2007, £267.1m in March 2008 and £16.2m in June 2008. At 31 December 2008 thevalue of the share in the Master Trust was £499.0m (2007: £782.3m).

(d) Aire Valley Mortgages 2006-1 plcThis SPV issued £2,430.1m of loan notes denominated in US Dollars, Euros and Sterling in August 2006 to purchase a £2,430.1m share in theMaster Trust. At 31 December 2008 the value of the share in the Master Trust was £2,430.1m (2007: £2,430.1m).

(e) Aire Valley Warehousing 3 LtdThis was a warehouse deal issued in December 2006 for £1,000.0m to purchase a £1,000.0m share in the Master Trust. The notes matured inJuly 2008. At 31 December 2008 the value of the share in the Master Trust was £nil (2007: £1,000.0m).

(f) Aire Valley Mortgages 2007-1 plcThis SPV issued £2,495.1m of loan notes denominated in US Dollars, Euros and Sterling in May 2007 to purchase a £2,495.1m share in theMaster Trust. At 31 December 2008 the value of the share in the Master Trust was £2,495.1m (2007: £2,495.1m).

(g) Aire Valley Mortgages 2007-2 plcThis SPV issued £1,156.3m of loan notes denominated in Euros and Sterling in November 2007 to purchase a £1,156.3m share in the MasterTrust. In October 2008 £175.8m of loan notes were redeemed. At 31 December 2008 the value of the share in the Master Trust was £980.5m(2007: £1,156.3m).

(h) Bradford & Bingley Warehousing No. 1 LLPIn June 2008, Bradford & Bingley Warehousing No. 1 LLP agreed a loan facility with Barclays Bank PLC of £1,000.0m with maturity in April 2012,and securitised assets of £1,826.0m. In October 2008 £85.2m of the loan was redeemed. A start-up loan of £12.0m in the form of subordinateddebt was provided by Bradford & Bingley plc. Securitised assets at 31 December 2008 were £1,667.9m, loan balance £914.8m and subordinateddebt £12.0m.

(i) Aire Valley Mortgages 2008-1 plcThis SPV issued £2,900.0m of loan notes denominated in Euros and Sterling in July 2008 to purchase a £2,900.0m share in the Master Trust. At 31December 2008 the value of the share in the Master Trust was £2,900.0m.

(j) Bowler Finance plcThis SPV issued £4,450.0m of loan notes denominated in Sterling in July 2008 to purchase a £4,450.0m interest in mortgages. In September 2008£80.2m and in December 2008 £137.0m of loan notes were redeemed. At 31 December 2008 securitised assets were £4,325.6m and loannotes were £4,232.8m.


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12. Securitised assets and secured funding continued(k) Bradford & Bingley Covered Bonds LLPThe Euro 15,000.0m Covered Bond programme was launched in May 2004 with the issue of a Euro 2,000.0m note, with bullet maturity in May2009. A covered bond is a full recourse debt instrument secured against a pool of eligible mortgages. Bradford & Bingley Covered Bonds LLP wasformed, and a trustee was appointed to ensure compliance with the covered bond rules. The pool of mortgages remains on the balance sheet ofthe mortgage issuer. This covered bond structure represents a revolving credit agreement. The value of qualifying mortgages may not fall belowthe value of the loan notes, and qualifying loans are taken into the partnership to ensure this.The Covered Bond programme issued further series of loan notes:In May 2006: Euro 1,000.0m with bullet maturity in May 2011 and Euro 2,000.0m with bullet maturity in May 2016. In May 2008 Euro 55.5m werebought back and cancelled.In June 2006: CHF 300.0m with bullet maturity in June 2012 and CHF 250.0m with bullet maturity in June 2016. In December 2007 CHF 15.0mwere bought back and cancelled, and in May 2008 CHF14.9m were bought back and cancelled.In October 2006: CHF 250.0m with bullet maturity in October 2010, CHF 300.0m with bullet maturity in October 2013, CHF 250.0m with bulletmaturity in October 2018 and CHF 200.0m with bullet maturity in October 2031. In October 2007 CHF 75.0m were bought back and cancelled,and in May 2008 CHF 128.2m were bought back and cancelled.In June 2007: Euro 1,250.0m with bullet maturity in June 2010 and Euro 1,250.0m with bullet maturity in June 2017. In May 2008 Euro 311.4mwere bought back and cancelled.In July 2007: CHF 200.0m with bullet maturity in July 2011. In October 2007 CHF 35.0m, in December 2007 CHF 15.0m and in May 2008 CHF25.4m were bought back and cancelled.In July 2007: CHF 200.0m with bullet maturity in July 2015. In October 2007 CHF 40.0m and in May 2008 CHF 36.2m were bought back andcancelled.In July 2007: CHF 150.0m with bullet maturity in July 2027. In December 2007 CHF 20.0m and in May 2008 CHF 18.3m were bought back andcancelled.In September 2007: GBP 500.0m with bullet maturity in September 2009.In October 2007: Euro 500.0m with bullet maturity in October 2008 (redeemed in October 2008) and Euro 100.0m with bullet maturity in October2010.In January 2008: GBP 500.0m with bullet maturity in October 2012.In September 2008: GBP 1,800.0m with bullet maturity in April 2012 and GBP 143.0m with bullet maturity in September 2009.At 31 December 2008 the funding of £8,589.1m (2007: £6,838.2m) was secured against £11,013.3m (2007: £10,849.7m) of mortgages.

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13. Debt securitiesGroup Company

2008 2007 2008 2007£m £m £m £m

Investment securities issued by public bodies- Government securities 980.0 1,518.8 980.0 1,518.8

Investment securities issued by other issuers- Bank and building society certificates of deposit - 1,223.6 - 1,171.5- Other debt securities 3,044.7 4,036.3 11,293.4 4,707.9

4,024.7 6,778.7 12,273.4 7,398.2Analysis of debt securities by listing status

- Listed 4,024.7 6,145.2 12,273.4 6,092.0- Unlisted - 633.5 - 1,306.2

4,024.7 6,778.7 12,273.4 7,398.2Debt securities are carried at fair value, which is calculated through reference to a market price. Where no reliable market price exists an assessment is made as to the value ofthe debt security based on the net present value of the future expected cash flows. At 31 December 2008 all debt securities are valued by reference to a market price and nomodelled valuations are used.Debt securities are treated as ‘available-for-sale’ with changes in fair value recorded as a movement in reserves or, in the case of embedded derivatives attached to collateraliseddebt obligations, through the Income Statement. Where fair value estimates show significant reductions in market price or where other indicators of potential impairment haveoccurred (for example, ratings downgrades, significant or prolonged decline in market price, or a failure of the vehicle to meet contractual liquidity requirements) impairment isassessed. Any reduction that is considered to be permanent is then taken as a charge through the ‘investment impairment loss’ line on the Income Statement.

The risks in the Group’s portfolio are managed on a Group basis. An analysis of the Group’s and Company’s liquidity and investment portfolio isprovided below: Group Baa1 Caa1 andWholesale assets 2008 Aaa Aa A1 to B3 belowAt 31 December £m % % % % %

Cash and balances at central banks 100.4 100 - - - -

Loans and advances to banks:- Reverse repos - - - - - -- Bank and time deposits 552.6 3 36 61 - -- Cash and other collateral 2,796.6 - 66 34 - -

Total loans and advances to banks 3,349.2 - 57 43 - -

Debt securities:Liquidity portfolio:

- UK Government securities 980.0 100 - - - -- Bank and supranational bonds 1,379.2 81 19 - - -- Bank certificates of deposit - - - - - -- UK and European Aaa mortgage backed securities 1,009.9 100 - - - -- Other asset backed securities 183.4 48 35 13 4 -

Total liquidity portfolio 3,552.5 90 9 1 - -

Structured finance portfolio:- Principal protected notes 428.2 64 17 19 - -- Collateralised debt obligations - - - - - -- Collateralised loan obligations - - - - - -- Structured investment vehicles - - - - - -- Credit funds 44.0 - - 60 40 -

Total structured finance portfolio 472.2 58 15 23 4 -

Total debt securities 4,024.7 48 31 21 - -Total wholesale assets excluding embedded derivatives 7,474.3 49 32 19 - -

Embedded derivatives -Total market value of wholesale assets 7,474.3Structured finance portfolio net of embedded derivatives 472.2



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13. Debt securities continuedGroup Baa1 Caa1 andWholesale assets 2007 Aaa Aa A to B3 belowAt 31 December £m % % % % %


Treasury bills 185.0 100 - - - -

Loans and advances to banks:- Reverse repos 253.4 100 - - - -- Bank and time deposits 1,344.6 15 82 3 - -- Cash and other collateral 794.1 24 76 - - -

Total loans and advances to banks 2,392.1 27 71 2 - -


- UK Government securities 1,518.8 100 - - - -- Bank and supranational bonds 1,398.8 77 21 2 - -- Bank certificates of deposit 1,223.6 16 74 10 - -- UK and European Aaa mortgage backed securities 1,204.3 100 - - - -- Other asset backed securities 257.4 41 37 16 6 -

Total liquidity portfolio 5,602.9 73 23 4 - -

Structured finance portfolio:- Principal protected notes 582.0 41 51 8 - -- Collateralised debt obligations 218.4 76 15 7 2 -- Collateralised loan obligations 238.2 58 32 5 5 -- Structured investment vehicles 63.5 - - - - 100- Credit funds 73.7 - 8 60 32 -

Total structured finance portfolio 1,175.8 46 35 10 4 5

Total debt securities 6,778.7 69 25 4 1 1Total wholesale assets excluding embedded derivatives 9,565.0 59 36 3 1 1

(49.7)Total market value of wholesale assets 9,515.3

1,126.1

Embedded derivatives are carried within derivative financial assets and derivative financial liabilities on the Balance Sheet.

Embedded derivatives

Structured finance portfolio net of embedded derivatives

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13. Debt securities continuedCompany Baa1 Caa1 andWholesale assets 2008 Aaa Aa A to B3 belowAt 31 December £m % % % % %


Loans and advances to banks:- Reverse repos - - - - - -- Bank and time deposits 552.6 3 36 61 - -- Cash and other collateral 828.2 - 51 49 - -



- UK Government securities 980.0 100 - - - -- Bank and supranational bonds 1,379.6 81 19 - - -- Bank certificates of deposit - - - - - -- UK and European Aaa mortgage backed securities 9,147.4 80 1 - 19 -- Other asset backed securities 183.1 48 35 13 4 -

Total liquidity portfolio 11,690.1 81 4 - 15 -

Structured finance portfolio:- Principal protected notes 428.2 64 17 19 - -- Collateralised debt obligations - - - - - -- Collateralised loan obligations - - - - - -- Structured investment vehicles - - - - - -- Credit funds 155.1 - - 18 12 70

Total structured finance portfolio 583.3 58 15 23 4 -


Embedded derivatives -Total market value of wholesale assets 13,754.6Structured finance portfolio net of embedded derivatives 583.3


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13. Debt securities continuedCompany Baa1 Caa1 andWholesale assets 2007 Aaa Aa A to B3 belowAt 31 December £m % % % % %


Treasury bills 185.0 100 - - - -

Loans and advances to banks:- Reverse repos 253.4 100 - - - -- Bank and time deposits 1,344.6 15 82 3 - -- Cash and other collateral 303.9 35 65 - - -



- UK Government securities 1,518.8 100 - - - -- Bank and supranational bonds 1,101.7 95 3 2 - -- Bank certificates of deposit 1,171.5 17 72 11 - -- UK and European Aaa mortgage backed securities 1,660.0 100 - - - -- Other asset backed securities 555.2 20 43 7 30 -- Other 215.2 - - 100 - -

Total liquidity portfolio 6,222.4 73 17 7 3 -

Structured finance portfolio:- Principal protected notes 582.0 41 51 8 - -- Collateralised debt obligations 218.4 76 15 7 2 -- Collateralised loan obligations 238.2 58 32 5 5 -- Structured investment vehicles 63.5 - - - - 100- Credit funds 73.7 - 8 60 32 -

Total structured finance portfolio 1,175.8 46 35 10 4 5


(49.7)9,644.61,126.1

Embedded derivatives are carried within derivative financial assets and derivative financial liabilities on the Balance Sheet.

Additional analysis of the underlying collateral within the structured finance portfolio by geographic region and by type of exposure is provided inthe table below:Group Analysis of investment by geographic region Analysis of investment by type of assetStructured finance portfolio Mortgage Asset

backed backed CorporateUK Europe US Other Total securities securities loans Other Total

2008 £m % % % % % % % % % %

Principal protected notes 428.2 52 41 6 1 100 - 2 84 14 100Collateralised debt obligations - - - - - - - - - - -Collateralised loan obligations - - - - - - - - - - -Structured investment vehicles - - - - - - - - - - -Credit funds 44.0 - 100 - - 100 - - 83 17 100

472.2 100 100

Analysis of investment by geographic region Analysis of investment by type of assetMortgage Asset


2007 £m % % % % % % % % % %

Principal protected notes 582.0 48 48 3 1 100 - 3 62 35 100Collateralised debt obligations 218.4 - 28 71 1 100 49 - 51 - 100Collateralised loan obligations 238.2 - 57 43 - 100 - - 100 - 100Structured investment vehicles 63.5 21 19 52 8 100 - 100 - - 100Credit funds 73.7 9 91 - - 100 - - 74 26 100

1,175.8 100 100

Embedded derivativesTotal market value of wholesale assetsStructured finance portfolio net of embedded derivatives

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13. Debt securities continuedCompany Analysis of investment by geographic region Analysis of investment by type of assetStructured finance portfolio Mortgage Asset


2008 £m % % % % % % % % % %

Principal protected notes 428.2 52 41 6 1 100 - 2 84 14 100Collateralised debt obligations - - - - - - - - - - -Collateralised loan obligations - - - - - - - - - - -Structured investment vehicles - - - - - - - - - - -Credit funds 155.1 72 28 - - 100 - - 24 76 100

583.3 100 100

Analysis of investment by geographic region Analysis of investment by type of assetMortgage Asset


2007 £m % % % % % % % % % %

Principal protected notes 582.0 48 48 3 1 100 - 3 62 35 100Collateralised debt obligations 218.4 - 28 71 1 100 49 - 51 - 100Collateralised loan obligations 238.2 - 57 43 - 100 - - 100 - 100Structured investment vehicles 63.5 21 19 52 8 100 - 100 - - 100Credit funds 73.7 17 83 - - 100 - - 74 26 100

1,175.8 100 100

14. Investment impairment loss2008 2007

£m £m

Total liquidity portfolio (10.9) -Structured finance portfolio:

- Principal protected notes (84.2) -- Collateralised debt obligations (26.6) (30.2)- Collateralised loan obligations (1.8) -- Structured investment vehicles (47.9) (64.2)- Credit funds (20.2) -

Total structured finance portfolio (180.7) (94.4)

Total debt securities (191.6) (94.4)

15. Prepayments and accrued incomeGroup Company

2008 2007 2008 2007£m £m £m £m

Commission receivable 3.4 7.3 3.6 7.3Other 14.9 21.2 5.2 14.8

18.3 28.5 8.8 22.1


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16. Investments in Group undertakingsCompany 2008 2007

£m £m

At 1 January 543.7 543.7Investments 811.0 -Disposals (110.0) -At 31 December 1,244.7 543.7

Investments comprise:Shares 433.7 543.7Loans 811.0 -

1,244.7 543.7During the year, two subsidiary undertakings of the Company repaid external borrowings totalling £800.0m. To enable the repayments, the subsidiaries borrowed £811.0mfrom the Company. The Company then converted these loans into capital contributions.

During 2008 the Company transferred its holding in its Isle of Man subsidiary Bradford & Bingley International Limited to Abbey as described in note 2 ‘Gain/(loss) on sale ofassets and liabilities’.

The principal trading subsidiary undertakings of Bradford & Bingley plc at 31 December 2008 held directly or indirectly, all of which are fullyconsolidated into the Group Financial Statements, are listed below:

Country of Class ofincorporation Major activity shares held Interest

DirectBradford & Bingley Investments England Holding company Ordinary 100%Bradford & Bingley Treasury Services (Ireland) England Treasury activities Ordinary 100%IndirectMortgage Express England Residential mortgage lending Ordinary 100%

SPVsThe following entities are SPVs established in connection with the Group’s securitisation and covered bond programmes (see note 12). The Companyhas no ownership interest in these companies but they are regarded as subsidiaries as they are, in substance, controlled by the Company.

Country ofincorporation Major activity

Aire Valley Finance (No.2) plc England Debt issuanceAire Valley Mortgages 2004-1 plc England Debt issuanceAire Valley Mortgages 2005-1 plc England Debt issuanceAire Valley Mortgages 2006-1 plc England Debt issuanceAire Valley Mortgages 2007-1 plc England Debt issuanceAire Valley Mortgages 2007-2 plc England Debt issuanceAire Valley Mortgages 2008-1 plc England Debt issuanceAire Valley Warehousing 3 Ltd England Debt issuanceBowler Finance plc England Debt issuanceBradford & Bingley Warehousing No. 1 LLP England Mortgage fundingBradford & Bingley Covered Bonds LLP England Mortgage fundingBradford & Bingley Investments, Bradford & Bingley Treasury Services (Ireland) and Mortgage Express are all unlimited companies. No fair value is provided in respect of shares inGroup undertakings as these shares do not have a quoted market price.

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17. Other assetsGroup Company

2008 2007 2008 2007£m £m £m £m

Consideration due in respect of sale of assets - 645.9 - 645.9Available-for-sale equity investments - 2.1 - 2.1Other 2.7 5.7 1.4 4.3

2.7 653.7 1.4 652.3

18. Deferred taxationThe net deferred taxation asset/(liability) is attributable to the following:Group Assets Liabilities Net

2008 2007 2008 2007 2008 2007£m £m £m £m £m £m

Change in accounting basis on adoption of IFRS 12.3 14.1 (16.8) (19.2) (4.5) (5.1)Cash flow hedges 57.7 23.4 - - 57.7 23.4Accelerated tax depreciation 5.7 3.7 - - 5.7 3.7Fair value movements 1.5 1.2 (299.2) (2.5) (297.7) (1.3)Employee benefits 19.2 27.6 (19.5) (24.5) (0.3) 3.1Taxation value of losses carried forward 148.2 - - - 148.2 -

244.6 70.0 (335.5) (46.2) (90.9) 23.8Offset (244.6) (46.2) 244.6 46.2 - -

- 23.8 (90.9) - (90.9) 23.8£202.5m (2007: £nil) of deferred tax assets have not been recognised, relating to unused tax losses of £723.1m. Due to uncertainty as to whether the Group will be permitted tocarry forward losses which arose before the Transfer and the sale to Abbey of savings related assets and liabilities, these deferred tax assets have not been recognised.£148.2m of deferred tax assets have been recognised in respect of losses which arose after the Transfer and the sale to Abbey; management expectations, based on detailedbusiness plans, are that there will be sufficient taxable profits in future years to utilise these losses.

Company Assets Liabilities Net2008 2007 2008 2007 2008 2007

£m £m £m £m £m £m

Change in accounting basis on adoption of IFRS 7.4 8.5 (12.9) (14.7) (5.5) (6.2)Cash flow hedges 57.7 23.4 - - 57.7 23.4Accelerated tax depreciation 2.2 1.5 - - 2.2 1.5Fair value movements - - (1.7) - (1.7) -Employee benefits 19.2 27.6 (19.5) (24.5) (0.3) 3.1Taxation value of losses carried forward 130.7 - - - 130.7 -

217.2 61.0 (34.1) (39.2) 183.1 21.8Offset (34.1) (39.2) 34.1 39.2 - -

183.1 21.8 - - 183.1 21.8£158.3m (2007: £nil) of deferred tax assets have not been recognised, relating to unused tax losses of £565.4m. Due to uncertainty as to whether the Company will bepermitted to carry forward losses which arose before the Transfer and the sale to Abbey of savings related assets and liabilities, these deferred tax assets have not beenrecognised. £130.7m of deferred tax assets have been recognised in respect of losses which arose after the Transfer and the sale to Abbey; management expectations, basedon detailed business plans, are that there will be sufficient taxable profits in future years to utilise these losses.

The movements in the Group’s temporary differences during the year and previous year were as follows:At Recognised Recognised At

1 January 2008 in income in equity 31 December 2008£m £m £m £m

Change in accounting basis on adoption of IFRS (5.1) 0.6 - (4.5)Cash flow hedges 23.4 - 34.3 57.7Accelerated tax depreciation 3.7 2.0 - 5.7Fair value movements (1.3) (8.7) (287.7) (297.7)Employee benefits 3.1 (8.4) 5.0 (0.3)Taxation value of losses carried forward - 17.5 130.7 148.2

23.8 3.0 (117.7) (90.9)


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18. Deferred taxation continuedAt Recognised Recognised At


Change in accounting basis on adoption of IFRS (6.1) 1.0 - (5.1)Cash flow hedges (8.9) - 32.3 23.4Accelerated tax depreciation 1.0 2.7 - 3.7Fair value movements 5.2 (6.5) - (1.3)Employee benefits 17.4 2.6 (16.9) 3.1Taxation value of losses carried forward (2.9) 2.9 - -

5.7 2.7 15.4 23.8

The movements in the Company’s temporary differences during the year and previous year were as follows:At Recognised Recognised At


Change in accounting basis on adoption of IFRS (6.2) 0.7 - (5.5)Cash flow hedges 23.4 - 34.3 57.7Accelerated tax depreciation 1.5 0.7 - 2.2Fair value movements - (1.7) - (1.7)Employee benefits 3.1 (8.4) 5.0 (0.3)Taxation value of losses carried forward - - 130.7 130.7

21.8 (8.7) 170.0 183.1

At Recognised Recognised At 1 January 2007 in income in equity 31 December 2007

£m £m £m £m

Change in accounting basis on adoption of IFRS (7.5) 1.3 - (6.2)Cash flow hedges (8.9) - 32.3 23.4Accelerated tax depreciation 3.4 (1.9) - 1.5Fair value movements 3.6 (3.6) - -Employee benefits 17.4 2.6 (16.9) 3.1

8.0 (1.6) 15.4 21.8Deferred taxation appropriately reflects the change to the standard rate of UK corporation tax from 30% to 28% which became effective on 1 April 2008.

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19. Property, plant and equipment Group Equipment,

Land and fixtures andbuildings vehicles Total

£m £m £m

CostAt 1 January 2008 94.6 107.7 202.3Additions 0.1 16.9 17.0Disposals to Abbey (55.8) (38.9) (94.7)Disposals - other (5.3) (17.7) (23.0)Written off (3.8) (4.9) (8.7)At 31 December 2008 29.8 63.1 92.9DepreciationAt 1 January 2008 28.1 67.7 95.8Depreciation charge for the year 1.0 8.8 9.8Impairment charge 15.0 25.5 40.5Disposals to Abbey (20.1) (24.0) (44.1)Disposals - other (2.6) (14.9) (17.5)Written off (3.8) (4.9) (8.7)At 31 December 2008 17.6 58.2 75.8Net book valueAt 1 January 2008 66.5 40.0 106.5At 31 December 2008 12.2 4.9 17.1

Group Equipment,Land and fixtures andbuildings vehicles Total

£m £m £m

CostAt 1 January 2007 99.8 94.6 194.4Additions 1.1 28.2 29.3Disposals (6.3) (15.1) (21.4)At 31 December 2007 94.6 107.7 202.3DepreciationAt 1 January 2007 30.1 73.5 103.6Depreciation charge for the year 1.1 6.6 7.7Disposals (3.1) (12.4) (15.5)At 31 December 2007 28.1 67.7 95.8Net book valueAt 1 January 2007 69.7 21.1 90.8At 31 December 2007 66.5 40.0 106.5Property, plant and equipment was transferred to Abbey at its net book value of £50.6m (see note 2 - ‘Gain/(loss) on sale of assets and liabilities’).In addition, sale proceeds from the sale and leaseback of land and buildings were £10.1m (2007: £10.1m) resulting in a profit of £7.5m (2007: £8.8m) which has been includedin the Income Statement in non-operating income.Sale proceeds from other asset disposals were £2.9m (2007: £4.4m) resulting in a loss on sale of £nil (2007: £0.2m). Following the Transfer, all land and buildings were valued by qualified independent chartered surveyors. As a result of these valuations and the ongoing economic value in use after theTransfer of the buildings there has been an impairment charge of £15.0m to reduce the carrying value of the land and buildings to £12.2m.Equipment, fixtures and vehicles, specifically head office computer equipment and infrastructure, has been written down to zero, resulting in an impairment charge of £25.5m to reflectthe ongoing economic value in use and future obsolescence of these assets in light of the developments in business operations and future strategy of the business after the Transfer.£2.6m of the impairment charge occurred as a result of the closure of the Group’s mortgage servicing operations in North London and other mortgage sales activities announced on 25September 2008.


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19. Property, plant and equipment continuedCompany Equipment,

Land and fixtures andbuildings vehicles Total

£m £m £m

CostAt 1 January 2008 88.0 99.5 187.5Additions 0.1 14.8 14.9Disposals to Abbey (54.8) (37.7) (92.5)Disposals - other (5.3) (14.3) (19.6)Written off (0.1) (4.2) (4.3)At 31 December 2008 27.9 58.1 86.0DepreciationAt 1 January 2008 27.0 64.7 91.7Depreciation charge for the year 0.7 8.7 9.4Impairment charge 10.6 25.1 35.7Disposals to Abbey (19.9) (23.0) (42.9)Disposals - other (2.6) (14.3) (16.9)Written off (0.1) (4.2) (4.3)At 31 December 2008 15.7 57.0 72.7Net book valueAt 1 January 2008 61.0 34.8 95.8At 31 December 2008 12.2 1.1 13.3

Company Equipment,Land and fixtures andbuildings vehicles Total

£m £m £m

CostAt 1 January 2007 93.1 82.7 175.8Additions 1.1 25.7 26.8Disposals (6.2) (8.9) (15.1)At 31 December 2007 88.0 99.5 187.5DepreciationAt 1 January 2007 29.0 67.3 96.3Depreciation charge for the year 1.0 6.1 7.1Disposals (3.0) (8.7) (11.7)At 31 December 2007 27.0 64.7 91.7Net book valueAt 1 January 2007 64.1 15.4 79.5At 31 December 2007 61.0 34.8 95.8Property, plant and equipment was transferred to Abbey at its net book value of £49.6m. Sale proceeds from the sale and leaseback of land and buildings were £10.1m (2007: £10.1m) resulting in a profit of £7.5m (2007: £8.8m) which has been included in theIncome Statement in non-operating income.Sale proceeds from other asset disposals were £0.1m (2007: £2.1m) resulting in a loss on sale of £nil (2007: £nil). Following the Transfer, all land and buildings were valued by qualified independent chartered surveyors. As a result of these valuations and the ongoing economic value in useafter the Transfer of the buildings there has been an impairment charge of £10.6m to reduce the carrying value of the land and buildings to £12.2m.Equipment, fixtures and vehicles, specifically head office computer equipment and infrastructure has been written down to zero, resulting in an impairment charge of £25.1m toreflect the ongoing economic value in use and future obsolescence of these assets in light of the developments in business operations and future strategy of the business afterthe Transfer.

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20. Intangible assetsGroup Company

£m £m

CostAt 1 January 2008 110.0 57.7Additions 6.9 4.3Disposals to Abbey (7.4) (7.1)Disposals - other (13.2) (12.7)Written off (49.7) (6.9)At 31 December 2008 46.6 35.3AmortisationAt 1 January 2008 69.0 45.1Amortisation charge for the year 9.5 3.9Impairment charge 34.8 9.4Disposals to Abbey (3.8) (3.5)Disposals - other (13.2) (12.7)Written off (49.7) (6.9)At 31 December 2008 46.6 35.3Net book valueAt 1 January 2008 41.0 12.6At 31 December 2008 - -

Group Company£m £m

CostAt 1 January 2007 114.3 66.9Additions 5.0 0.1Disposals (9.3) (9.3)At 31 December 2007 110.0 57.7AmortisationAt 1 January 2007 59.1 45.0Amortisation charge for the year 14.9 5.1Disposals (5.0) (5.0)At 31 December 2007 69.0 45.1Net book valueAt 1 January 2007 55.2 21.9At 31 December 2007 41.0 12.6Intangible assets were transferred to Abbey at their net book value of £3.6m (Group and Company). Following the Transfer, it was deemed that intangible software with a book value of £34.8m (Group) and £9.4m (Company) was fully impaired and written down to zero to reflectthe ongoing economic value in use and future obsolesence of those assets in light of the developments in business operations and future strategy of the business.

21. Deposits by banksAt 31 December Group Company

2008 2007 2008 2007£m £m £m £m

Items in the course of transmission 77.3 30.5 76.0 29.1Other amounts due to banks 9,241.2 2,043.9 8,067.9 1,629.4

9,318.5 2,074.4 8,143.9 1,658.5

22. Other depositsAt 31 December Group Company

2008 2007 2008 2007£m £m £m £m

Amounts due to subsidiary undertakings - - 29,509.6 22,420.9Collateral received 641.6 - - -Amounts due to other depositors 186.5 24,152.6 775.8 21,180.9

828.1 24,152.6 30,285.4 43,601.8


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23. HM Treasury Working Capital FacilityFollowing the Transfer, the Bank of England provided the Company with a Working Capital Facility. This was subsequently replaced by a WorkingCapital Facility (WCF) provided by HM Treasury. At 31 December 2008 the Company had drawn £2,275.7m of this facility. The amounts drawnunder this facility bear a commercial rate of interest. HM Treasury has indicated that its current intention, subject to appropriate clearance beingobtained from the European Commission for restructuring aid for the Company, and any other constraints imposed by European law, is tocontinue to fund the Company as a going concern, and to enable the Company to meet its debts as and when they fall due, for a period of notless than 12 months from 31 March 2009.

It is expected that the WCF is to be repaid out of the cash flows generated by the Company and the Group during their wind-down. These cashflows will principally comprise interest and redemptions arising on loans to customers. The redemption profile of loans to customers is uncertain;many of these loans have contractual maturities of 25 years or more from the date of advance, but experience has been that most loans tocustomers redeem earlier than their contractual maturity dates. Consequently the timing of the repayment of the WCF is uncertain.

24. Statutory DebtFollowing the Transfer and the sale of the savings related assets and liabilities on 29 September 2008 the Financial Services CompensationScheme made available a cash amount to Abbey representing the balance of the liabilities transferred. As a consequence a debt has beencreated repayable by the Company of £18,413.9m referred to as the Statutory Debt. This liability bears no interest charges and there is noprovision to increase its amount.

It is expected that the Statutory Debt is to be repaid out of the cash flows generated by the Company and the Group during their wind-down.These cash flows will principally comprise interest and redemptions arising on loans to customers. The redemption profile of loans to customers isuncertain; many of these loans have contractual maturities of 25 years or more from the date of advance, but experience has been that mostloans to customers redeem earlier than their contractual maturity dates. Consequently the timing of the repayment of the Statutory Debt isuncertain.

25. Debt securities in issueAt 31 December Group Company

2008 2007 2008 2007£m £m £m £m

Bonds and medium term notes 13,364.0 12,668.8 13,364.0 13,175.3Other debt securities in issue 7,302.3 9,639.3 - 1,233.8

20,666.3 22,308.1 13,364.0 14,409.1The Group and Company issue debt securities to securitise loans and advances to customers through SPVs as described in note 12. These debt securities are included in theamounts above. Certain debt securities in issue including those issued through SPVs are subject to fair value hedge designation, and the carrying values of these instrumentsare adjusted to reflect the fair value of the risks being hedged.

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26. Other liabilitiesAt 31 December Group Company

2008 2007 2008 2007£m £m £m £m

Income tax - 56.0 - 54.6Surplus conversion shares 14.9 25.7 14.9 25.7Other creditors 65.8 59.5 51.3 47.8

80.7 141.2 66.2 128.1The income tax liability comprises taxes deducted at source from interest paid to investors.

27. Accruals and deferred incomeAt 31 December Group Company

2008 2007 2008 2007£m £m £m £m

Accrued interest on subordinated liabilities 31.7 32.1 37.4 37.7Accrued interest on other capital instruments 5.7 5.6 - -Deferred income 1.7 2.1 1.7 2.1Other 44.5 44.3 45.7 45.6

83.6 84.1 84.8 85.4

28. Post-retirement benefit obligations(a) Pension schemesThe Group operates a closed defined benefit staff pension scheme, the Bradford & Bingley Staff Pension Scheme (‘the principal scheme’), which isadministered by trustees. The funds are independent from those of the Group. The normal pension age of employees in the scheme is 65.

The Group also operates a defined contribution scheme, the Bradford & Bingley Group Pension Plan. The funds of this scheme are independentfrom those of the Group. The Group and Company had no liabilities or prepayments associated with the defined contribution scheme at 31December 2008 (2007: £nil). The cost in the year to the Group of the defined contribution scheme was £1.7m (2007: £1.4m) and the cost to theCompany was £1.4m (2007: £1.0m).

(b) Other post-retirement benefitsThe Group provides healthcare benefits to some of its pensioners. The healthcare benefits are provided through a post-retirement medicalscheme into which the Company contributes 100% towards the cost of providing medical expense benefits for members who retired before 1January 1996 and 50% for members who retired after this date. The total number of members of the scheme as at 31 December 2008 was 411(2007: 515). Private medical costs are assessed in accordance with the advice of a qualified actuary.

(c) Accounting treatmentThe Group accounts for post-retirement benefit costs in accordance with IAS 19 and IFRIC 14. The full net actuarial deficit is carried on the Groupand Company Balance Sheets, and actuarial gains and losses are taken to Group and Company retained earnings rather than being charged orcredited in the Income Statement. Any net defined benefit asset is recognised to the extent to which the economic benefits are available to theGroup without any conditions outside the direct control of the Group having to be satisfied. The actuarial loss recognised in the Group andCompany retained earnings during the year was £17.8m (2007: £53.3m gain).

More than one employing Group entity contributes to the post-retirement benefit schemes. As there is no contractual agreement or stated policyfor charging the net defined benefit cost to individual Group entities, the net defined benefit cost is recognised in the Financial Statements of theCompany (being the sponsoring entity). Other individual Group entities, in their individual financial statements, recognise a cost equal to theircontributions payable for the period.

(d) Employee benefit obligationsThe amounts carried in the Group and Company Balance Sheets are as follows:

Defined benefit Post-retirementpension plans medical benefits Total

2008 2007 2008 2007 2008 2007£m £m £m £m £m £m

Present value of funded obligations 480.5 586.8 9.2 11.0 489.7 597.8Fair value of plan assets (485.3) (575.8) - - (485.3) (575.8)IFRIC 14 restriction 4.8 - - - 4.8 -Net liability - 11.0 9.2 11.0 9.2 22.0Amounts carried in the Balance Sheet:

- Liabilities - 11.0 9.2 11.0 9.2 22.0


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28. Post-retirement benefit obligations continued(d) Employee benefit obligations continuedThe amounts recognised in the Group Income Statement are as follows:

Defined benefit Post-retirementpension plans medical benefits Total

2008 2007 2008 2007 2008 2007£m £m £m £m £m £m

Current service cost 4.8 7.5 0.1 0.1 4.9 7.6Interest on plan obligations 34.5 29.9 0.6 0.5 35.1 30.4Expected return on plan assets (37.6) (34.4) - - (37.6) (34.4)

1.7 3.0 0.7 0.6 2.4 3.6Gain on curtailment (i) (22.3) - (0.8) - (23.1) -

(20.6) 3.0 (0.1) 0.6 (20.7) 3.6Actual return on plan assets (78.1) 27.5 - - (78.1) 27.5All amounts above have also been recognised in the Company Income Statement with the exception of £1.2m (2007: £1.4m) of the current service cost which has beenrecognised within other Group companies.

Changes in the present value of the defined benefit obligations were as follows:Defined benefit Post-retirement

pension plans medical benefits Total2008 2007 2008 2007 2008 2007

£m £m £m £m £m £m

Opening defined benefit obligations 586.8 621.9 11.0 10.6 597.8 632.5Current service cost 4.8 7.5 0.1 0.1 4.9 7.6Contributions by employees 0.8 0.9 - - 0.8 0.9Interest on plan obligations 34.5 29.9 0.6 0.5 35.1 30.4Actuarial (gain)/loss (101.5) (60.4) (1.3) 0.2 (102.8) (60.2)Gain on curtailment (i) (22.3) - (0.8) - (23.1) -Obligation transfer (ii) (3.9) - - - (3.9) -Benefits paid (18.7) (13.0) (0.4) (0.4) (19.1) (13.4)Closing defined benefit obligations 480.5 586.8 9.2 11.0 489.7 597.8

Changes in the fair value of plan assets were as follows:Defined benefit Post-retirement

pension plans medical benefits Total2008 2007 2008 2007 2008 2007

£m £m £m £m £m £m

Opening fair value of plan assets 575.8 549.3 - - 575.8 549.3Expected return on plan assets 37.6 34.4 - - 37.6 34.4Contributions by employing entities 9.3 11.0 0.4 0.4 9.7 11.4Contributions by employees 0.8 0.9 - - 0.8 0.9Actuarial (loss)/gain (115.7) (6.9) - - (115.7) (6.9)Asset transfer (ii) (4.0) - - (4.0) -Benefits paid (18.5) (12.9) (0.4) (0.4) (18.9) (13.3)Closing fair value of plan assets 485.3 575.8 - - 485.3 575.8(i) Gain on curtailment

Employees who transferred to Abbey as a consequence of the sale of the savings business on 29 September 2008 and who were members of the defined benefit schemebecame deferred members as of the date of transfer. The curtailment gain of £23.1m arising on this event has been calculated in accordance with IAS 19 and is included in theGroup Income Statement within ‘Gain/(loss) on sale of assets and liabilities’ described in note 2. (ii) Transfer of obligations and assetsBradford & Bingley International Ltd was sold to Abbey on 29 September 2008. Employees of Bradford & Bingley International Ltd who were members of the defined benefitscheme remain members of the scheme but the pension obligations and assets relating to those employees has been transferred to Abbey with effect from 29 September 2008. The Group expects to contribute £6.9m to its defined benefit pension plans in 2009.

The major categories of plan assets as a percentage of total plan assets at 31 December as follows:2008 2007

Equities 34% 44%Property 10% 15%Bonds 25% 27%Gilts 13% 6%Cash and other 18% 8%

100% 100%

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28. Post-retirement benefit obligations continued(d) Employee benefit obligations continuedThe principal actuarial assumptions (expressed as weighted averages) were as follows:

2008 2007

To determine benefit obligationsDiscount rate at 31 December 6.3% 5.8%Future pension increases 3.0% 3.4%Rate of salary increase 5.0% 5.4%To determine the net pension costExpected return on plan assets 6.8% 6.3%Discount rate 6.3% 5.1%Rate of salary increase 5.4% 5.1%For post-retirement medical planDiscount rate 6.3% 5.8%Inflation 3.0% 3.4%Medical cost trend for next financial year 6.0% 6.5%Medical cost trend falling linearly for subsequent 2 years 6.0% 6.5% to 5.5%Medical cost trend thereafter 6.0% 5.5%In determining the expected long-term return on plan assets, the Company considered the current level of expected returns on risk-free investments (primarily governmentbonds), the historical level of risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns on each asset class.The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term return for the portfolio.

The principal assumption made on life expectancy for active and retired members was to use PA92 (YOB) base rated up by 2 years. As an illustrationof the mortality rates used, the future life expectancies from age 60 are shown below:

Males Females

Non-retired members’ life expectancy* 25.9 28.7Retired members’ life expectancy** 23.8 26.8* based on 1965 year of birth** based on 1935 year of birth

SensitivityThe following table illustrates the sensitivity of the pension scheme defined benefit obligation to four key assumptions: the discount rate, the rateof inflation, the rate of salary growth and the mortality assumption.Assumption Change in assumption Impact on benefit obligation

Discount rate Decrease by 0.5% Increase by 11.9%Inflation Increase by 0.5% Increase by 10.4%Salary growth above inflation Increase by 0.5% Increase by 1.8%Mortality Decrease by 1 year Increase by 2.3%If the assumptions were to change by the same amount in the opposite direction to those illustrated, the benefit obligation would decrease or increase by a similar percentage tothose shown in the table in each case.

Assumed healthcare cost trend rates have an effect on the amounts recognised in staff costs. A one percentage point change in assumedhealthcare cost trend rates would have the following effects:

2008 2007£m £m

Effect on the aggregate of service cost and interest cost 0.1 0.1Effect on defined benefit obligations 1.5 1.9


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29. ProvisionsGroup and Company Empty

leasehold Compensation Restructuringpremises claims costs Total

£m £m £m £m

At 1 January 2008 0.9 50.7 8.1 59.7Charged in the year 5.5 - 69.1 74.6Released in the year - (20.0) - (20.0)Utilised in the year (0.3) (5.2) (25.2) (30.7)At 31 December 2008 6.1 25.5 52.0 83.6

Empty leasehold premisesThe empty leasehold premises provision relates to properties which, as at the Balance Sheet date, were no longer used for trading but weresubject to a lease agreement. The provision is based on either known or forecast future rental expenditure; the rental payments are due to bemade during the period 2009 to 2017.

Compensation claimsCompensation claims relate to potential payments to customers relating to endowment and other products sold in the past by the Group'sindependent advisory business. This business was sold in December 2004 following a strategic review. The provision is calculated on the basis ofa reasonable estimate of the size and expected timing of claims. It is not possible to give a precise indication of the timing or amount of futurepayments as external factors such as the performance of the stock market and market agitation could have a significant impact.

Restructuring costsRestructuring costs were incurred as a consequence of certain strategic changes made during the year and include redundancy, employeecontract termination and property related closure costs. In 2008 it includes a £46.6m provision (£57.4m charged in the year) for costs expected tobe incurred as a result of the Transfer on 29 September 2008 included in the amounts in note 2. The provision represents amounts expected to bepaid in 2009.

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30. Subordinated liabilitiesInitial First Transfer Group Company

interest due or Order 2008 2007 2008 2007rate callable classification £m £m £m £m

Dated securities- Subordinated notes 7.625% 2010 Dated 131.1 128.1 131.1 128.1- Fixed rate step-up subordinated notes 5.500% 2018 Dated 269.0 249.2 269.0 249.2- Fixed rate step-up subordinated notes 5.750% 2022 Dated 224.4 198.9 224.4 198.9- Subordinated notes 6.625% 2023 Dated 130.2 126.5 130.2 126.5- Subordinated notes LIBOR + 1.300% 2054 Dated - - 149.7 150.0

754.7 702.7 904.4 852.7Callable perpetual securities

- Perpetual subordinated notes 5.625% 2013 Undated 266.1 243.6 266.1 243.6- Perpetual subordinated notes 6.000% 2019 Undated 222.9 202.4 222.9 202.4- Perpetual subordinated notes 6.462% 2032 Undated - - 193.2 161.6

489.0 446.0 682.2 607.6Undated perpetual securities

- Perpetual subordinated bonds 13.000% Perpetual Undated 55.0 55.0 55.0 55.0- Perpetual subordinated bonds 11.625% Perpetual Undated 50.0 50.0 50.0 50.0

105.0 105.0 105.0 105.0Total subordinated liabilities 1,348.7 1,253.7 1,691.6 1,565.3The subordinated liabilities are all denominated in sterling.The carrying values of the liabilities are on an EIR basis which takes into account issue costs. The carrying value of individually hedged items also includes hedge accountingadjustments to reflect changes in the fair value of hedged risks. Accrued interest is carried within accruals and deferred income.The sterling subordinated notes due 2010 pay interest at a rate of 7.625% per annum until their maturity.The sterling fixed rate step-up subordinated notes due 2018 pay interest at a rate of 5.5% per annum until 15 January 2013 when the Company may either redeem them (onthat date or any subsequent interest payment date) or pay interest at a rate of 0.83% above the 3 month GBP LIBOR until redemption.The sterling fixed rate step-up subordinated notes due 2022 pay interest at a rate of 5.75% per annum until 12 December 2017 when the Company may either redeem them orpay interest at a rate of 2% above the relevant 5 year benchmark gilt rate until redemption.The sterling subordinated notes due 2023 pay interest at a rate of 6.625% per annum until their maturity.The sterling subordinated notes due 2054 pay interest quarterly at a rate of 1.3% above the 3 month GBP LIBOR, and can be redeemed at the option of the Company on theMarch 2015 interest payment date or any subsequent interest payment date until maturity.The sterling perpetual subordinated notes due 2013 pay interest at a rate of 5.625% per annum until 20 December 2013 and thereafter at 2.23% above the relevant 5 yearbenchmark gilt rate, and are redeemable by the issuer at its option on 20 December 2013 and on each fifth anniversary thereafter.The sterling perpetual subordinated notes due 2019 pay interest at a rate of 6% per annum until 10 December 2019 and thereafter at 1.93% above the relevant 5 yearbenchmark gilt rate, and are redeemable by the issuer at its option on 10 December 2019 and on each fifth anniversary thereafter. The sterling perpetual subordinated notes due 2032 pay interest at a rate of 6.462% until 2 June 2032 when the Company may either redeem them, or pay a rate of interest2.3% above the relevant 5 year benchmark gilt rate. The interest on both issues of perpetual subordinated bonds, which have no maturity date, is payable half-yearly in arrears. Interest incurred by the Group in 2008 with respectto subordinated liabilities was £82.1m (2007: £82.0m) and by the Company was £102.4m (2007: £91.7m). None of the subordinated liabilities can be repaid at the borrower’s option, except as stated above. The rights of repayment of the holders of subordinated debt, includingperpetual subordinated bonds, are subordinated to the claims of all depositors and creditors as regards the principal and interest thereon.The Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008 modified the rights of the holders of the Company's dated subordinated notes such that a nonpayment of any principal due in respect of a dated subordinated note shall not constitute an event of default under the note. Under the terms of the Bradford & Bingley plcTransfer of Securities and Property etc. (Amendment) Order 2009, which came into force on 20 February 2009, the Directors have the power to defer payment of the principaland interest on dated subordinated notes.

31. Other capital instrumentsGroup

2008 2007£m £m

Perpetual preferred securities 193.4 161.6Limited Partnership Share 75.0 -

268.4 161.6The carrying values of these liabilities are on an EIR basis which takes into account issue costs. The carrying value of individually hedged items also includes hedge accountingadjustments to reflect changes in the fair value of hedged risks. Accrued interest is carried within accruals and deferred income.On 29 May 2002, £150.0m (£148.5m net of expenses) of 6.462% guaranteed, non-voting, non-cumulative, perpetual preferred securities, Series A, were issued throughBradford & Bingley Capital Funding L.P., a Jersey based limited partnership. These securities are not subject to any mandatory redemption provisions; they are redeemable by theissuer at its option on 2 June 2032 and on each fifth anniversary thereafter. They have a fixed coupon and, if not redeemed in 2032, the coupon will be reset at a rate equal tothe sum of the relevant 5 year benchmark gilt rate plus a margin of 2.3% per annum. The Group is not obliged to, and will not, make any payments to the holders of the preferredsecurities other than those to which the holders of these securities are entitled under the terms of the preferred securities. Interest incurred in 2008 in respect of these securitieswas £9.7m (2007: £9.7m). The Limited Partnership Share represents £75.0m which was invested by Bradford & Bingley International Ltd in Bradford & Bingley Capital Funding II LP in March 2005. Bradford& Bingley International Ltd was sold to Abbey on 29 September 2008, as discussed in note 2. Interest is payable at GBP 3 month LIBOR plus 1.3%. This balance is redeemable atthe option of the Company on 31 March 2015, or on occurrence of certain regulatory or tax events.


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32. Share capitalGroup and Company ordinary shares of 25p each:

2008 2007 2008 2007Number of shares (m) £m £m

Ordinary shares authorised as at 1 January 882.0 882.0 220.5 220.5Increase in authorised capital 963.3 - 240.8 -Ordinary shares authorised as at 31 December 1,845.3 882.0 461.3 220.5

Ordinary shares issued and fully paid as at 1 January 617.7 634.4 154.4 158.6Ordinary shares issued during the year 827.6 - 206.9 -Ordinary shares repurchased and cancelled during the year - (16.7) - (4.2)Ordinary shares issued and fully paid as at 31 December 1,445.3 617.7 361.3 154.4At the Extraordinary General Meeting held on 17 July 2008 the shareholders approved a rights issue under which shareholders had the right to purchase 67 new ordinary sharesfor every 50 held, at a price of 55 pence per share. The new shares were admitted to trading, nil paid, on 18 July. 827,670,240 shares were issued, raising £400.9m net ofexpenses. During 2007 16,750,000 shares were purchased for cancellation at a cost of £58.6m including commissions and Stamp Duty. The Company has one class of shares: ordinary shares of 25p each, ranking equally in respect of rights attaching to voting, dividends and in the event of a winding-up. As aresult of the Transfer described in note 2 all share options were extinguished on 29 September 2008. As at 31 December 2008 6,032,243 of the Company's shares (2007:6,630,132) which had been held by trusts for the purpose of satisfying the obligations of incentive plans had been taken into ownership by HM Treasury as part of the Transfer.The cost to the Group of these shares is accounted for as a deduction from retained earnings of £20.4m (2007: £23.9m).

Bradford & Bingley Employees’ Share TrustOn 3 October 2000 the Company established an offshore employee share trust, the Bradford & Bingley Employees’ Share Trust, for the purpose ofreceiving monies and acquiring shares to be used in conjunction with any employee share schemes established by the Company. Prior to thenationalisation, the trustee of this trust, Halifax EES Trustees International Limited, held 6,032,243 (2007: 6,630,132) shares to satisfy share awardsand options which had been made or were to be made in accordance with the rules of the employee share schemes established by the Company.The trust has waived, in full, its rights to receive dividends on the shares held except in respect of the Executive Incentive Plan where dividends arereceived in full by the trust and distributed to the underlying beneficial holders of the shares. During 2007 the Company provided £18.7m in funds toenable the trust to purchase 4,500,000 shares.

Executive Share Option SchemeGrants of approved and unapproved share options were made under the rules of the Bradford & Bingley 2000 Share Option Scheme as detailedin note 34. The shares are exercisable subject to the achievement of a performance target linked to an increase in the Company’s earnings pershare. The options over shares are exercisable over the period of three to ten years after the date of the grant. At 31 December 2007 there wereoptions outstanding over 635,620 shares. These options were extinguished as a result of the Transfer.

Sharesave SchemeThe Company operates the Bradford & Bingley 2000 Sharesave Scheme, an Inland Revenue approved all-employee Save As You Earn shareoption scheme. Grants of share options under this scheme were made as detailed in note 34. The option prices represent a 20% discount to themarket price on the date of the grant. At 31 December 2007 there were 1,431 three year and 492 five year savings contracts in placerepresented by a total of 2,010,331 shares under option. These options were extinguished as a result of the Transfer.

On 8 December 2000 the Bradford & Bingley Qualifying Employee Share Ownership Trust was established to acquire shares for employees,including Directors, to satisfy options exercised under the Sharesave Scheme. Once the total shares held by the trust had been used the trust wasterminated and at 31 December 2007 the trust held no shares to satisfy options. In respect of dividends arising on the shares held, the trustwaived its rights to all but 0.0001 pence per share. The duty to provide shares to satisfy Sharesave Scheme exercises was assumed by theBradford & Bingley Employees’ Share Trust.

Employees’ Restricted Share Bonus PlanIn April 2002 the Employees’ Restricted Share Bonus Plan was established to allocate shares to employees following the achievement of specifiedperformance measures. The shares were to be released to the individuals in tranches annually in the three years following the allocation or on thethird anniversary of the award, depending on the conditions under which they were awarded, and subject to them remaining employed by theCompany on the anniversary dates. At 31 December 2007 there were 4,620 share allocations outstanding; these were extinguished as a result ofthe Transfer.

Performance Share PlanShares were awarded under the rules of the Bradford & Bingley 2000 Performance Share Plan as detailed in note 34. The shares awarded under thisplan have been released and no further awards have been made. There were no outstanding share awards at the time of Transfer at which point anyremaining would have been extinguished (2007: none).

Executive Incentive PlanThe Executive Incentive Plan was established to provide a replacement to the short and long term incentive plans for senior executives. The shortterm element consisted of a cash payment based on the achievement of pre-determined short term performance measures and an equivalentamount of deferred shares to be held in trust for three years. Dividends receivable on the deferred shares were paid to the underlying beneficialowners of the shares. After three years the long term element of the scheme could be applied in the form of an additional award of matchingshares subject to earnings per share growth. Matching share awards would be made when compound earnings per share growth achievedbetween RPI plus 3% and RPI plus 8%. The maximum number of matching shares was three matching shares for each deferred share. Prior to theTransfer there were 2,616,084 deferred shares held in trust (2007: 965,410).

Executive Incentive SchemeShares were awarded under the rules of the Executive Incentive Scheme 2007 as detailed in note 34. The shares under this plan have beenextinguished at Transfer on 29 September 2008. As such, there were no outstanding share awards at 31 December 2008 (2007: 988,510).

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33. Reconciliation of changes in equityGroup Share Capital Available- Cash flow Total capital

Share premium redemption for-sale hedge Retained andcapital reserve reserve reserve reserve earnings reserves

£m £m £m £m £m £m £m

At 1 January 2008 154.4 4.9 29.2 (61.9) (60.4) 1,144.6 1,210.8Net change in available-for-sale instruments - - - (286.2) - - (286.2)Net change in cash flow hedges - - - - (88.1) - (88.1)Actuarial losses on post-retirement benefit obligations - - - - - (12.8) (12.8)Net losses not recognised in the Income Statement - - - (286.2) (88.1) (12.8) (387.1) Profit for the financial year - - - - - 18.2 18.2Total recognised (expense)/income - - - (286.2) (88.1) 5.4 (368.9)Dividends - - - - - (87.9) (87.9) Issue of new shares 206.9 194.0 - - - - 400.9Use of own shares on exercise of employee optionsand for other employee share plans - - - - - 3.3 3.3Fair value of share options taken to share option reserve - - - - - 3.4 3.4 Deficit on share option exercises - - - - - (3.5) (3.5) At 31 December 2008 361.3 198.9 29.2 (348.1) (148.5) 1,065.3 1,158.1

Group Share Capital Available- Cash flow Total capitalShare premium redemption for-sale hedge Retained and

capital reserve reserve reserve reserve earnings reserves£m £m £m £m £m £m £m

At 1 January 2007 158.6 4.9 25.0 (1.5) 20.6 1,212.3 1,419.9Net change in available-for-sale instruments - - - (60.4) - - (60.4) Net change in cash flow hedges - - - - (81.0) - (81.0)Actuarial gains on post-retirement benefit obligations - - - - - 37.9 37.9Net (losses)/gains not recognised in the Income Statement - - - (60.4) (81.0) 37.9 (103.5) Profit for the financial year - - - - - 93.2 93.2Total recognised (expense)/income - - - (60.4) (81.0) 131.1 (10.3)Dividends - - - - - (126.5) (126.5) Use of own shares on exercise of employee optionsand for other employee share plans - - - - - 5.2 5.2Fair value of share options taken to share option reserve - - - - - 4.6 4.6 Deficit on share option exercises - - - - - (4.8) (4.8) Purchase of own shares held to satisfy employee share plans - - - - - (18.7) (18.7)Purchase and cancellation of own shares (4.2) - 4.2 - - (58.6) (58.6)At 31 December 2007 154.4 4.9 29.2 (61.9) (60.4) 1,144.6 1,210.8

Company Share Capital Available- Cash flow Total capitalShare premium redemption for-sale hedge Retained and

capital reserve reserve reserve reserve earnings reserves£m £m £m £m £m £m £m

At 1 January 2008 154.4 4.9 29.2 (61.9) (60.4) 858.7 924.9Net change in available-for-sale instruments - - - (1,026.0) - - (1,026.0)Net change in cash flow hedges - - - - (88.1) - (88.1)Actuarial losses on post-retirement benefit obligations - - - - - (12.8) (12.8)Net losses not recognised in the Income Statement - - - (1,026.0) (88.1) (12.8) (1,126.9) Profit for the financial year - - - - - 232.9 232.9Total recognised (expense)/income - - - (1,026.0) (88.1) 220.1 (894.0)Dividends - - - - - (87.9) (87.9) Issue of new shares 206.9 194.0 - - - - 400.9Use of own shares on exercise of employee optionsand for other employee share plans - - - - - 3.4 3.4Fair value of share options taken to share option reserve - - - - - 3.4 3.4Deficit on share option exercises - - - - - (3.5) (3.5) At 31 December 2008 361.3 198.9 29.2 (1,087.9) (148.5) 994.2 347.2


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33. Reconciliation of changes in equity continuedCompany Share Capital Available- Cash flow Total capital

Share premium redemption for-sale hedge Retained andcapital reserve reserve reserve reserve earnings reserves

£m £m £m £m £m £m £m

At 1 January 2007 158.6 4.9 25.0 (1.4) 20.6 981.4 1,189.1Net change in available-for-sale instruments - - - (60.5) - - (60.5) Net change in cash flow hedges - - - - (81.0) - (81.0)Actuarial gains on post-retirement benefit obligations - - - - - 37.9 37.9Net (losses)/gains not recognised in the Income Statement - - - (60.5) (81.0) 37.9 (103.6) Profit for the financial year - - - - - 38.2 38.2Total recognised (expense)/income - - - (60.5) (81.0) 76.1 (65.4)Dividends - - - - - (126.5) (126.5) Use of own shares on exercise of employee optionsand for other employee share plans - - - - - 5.2 5.2Fair value of share options taken to share option reserve - - - - - 4.6 4.6Deficit on share option exercises - - - - - (4.8) (4.8) Purchase of own shares held to satisfy employee share plans - - - - - (18.7) (18.7)Purchase and cancellation of own shares (4.2) - 4.2 - - (58.6) (58.6)At 31 December 2007 154.4 4.9 29.2 (61.9) (60.4) 858.7 924.9The share premium reserve represents the excess of the consideration received for issued shares over the nominal value of those shares, net of transaction costs.The capital redemption reserve was created on the sale of surplus conversion shares and to maintain the total amount of capital when shares were repurchased by the Company.The available-for-sale reserve represents cumulative fair value movements on assets which are still held at the Balance Sheet date and are classified as available-for-sale.The cash flow hedge reserve represents cumulative fair value movements on financial instruments which are still held at the Balance Sheet date and are effective cash flow hedges.

34. Share-based paymentsDuring the year, the Group had six share-based payment schemes with employees. These are all accounted for by the Group and Company asset out below.As a result of the Transfer on 29 September 2008, as described in note 2 ‘Gain/(loss) on sale of assets & liabilities’, all share schemes wereextinguished as of that date. As required by IFRS 2 ‘Share-based Payment’, the Income Statement includes an accelerated charge of £4.1m (2007:£nil), representing all previously unexpensed costs in respect of share schemes at the point of extinguishment.Arrangement Sharesave Scheme

‘Save As ‘Save As ‘Save As ‘Save As ‘Save As ‘Save As ‘Save As ‘Save As ‘Save As ‘Save As ‘Save AsNature of the You Earn’ You Earn’ You Earn’ You Earn’ You Earn’ You Earn’ You Earn’ You Earn’ You Earn’ You Earn’ You Earn’arrangement Scheme Scheme Scheme Scheme Scheme Scheme Scheme Scheme Scheme Scheme Scheme

Date of grant 20/3/03 18/3/04 18/3/04 24/3/05 24/3/05 17/3/06 17/3/06 15/3/07 15/3/07 14/3/08 14/3/08Number of instruments granted 789,338 1,832,649 427,490 510,251 155,307 419,466 300,192 645,928 201,219 4,139,146 2,185,737Exercise price £2.24 £2.45 £2.45 £2.58 £2.58 £3.72 £3.72 £3.73 £3.73 £1.45 £1.45Quoted share price at grant date £2.98 £3.05 £3.05 £3.06 £3.06 £5.22 £5.22 £4.38 £4.38 £2.01 £2.01Contractual life (years) 5.5 3.5 5.5 3.5 5.5 3.5 5.5 3.5 5.5 3.5 5.5

Settlement Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares SharesExpected volatility 32% 29% 29% 27% 27% 22% 26% 24% 27% 39% 34%Expected life at grant date (years) 5.1 3.1 5.1 3.1 5.1 3.1 5.1 3.1 5.1 3.1 5.1Risk-free interest rate 4.2% 4.5% 4.5% 4.6% 4.6% 4.4% 4.4% 5.2% 5.0% 4.3% 4.4%Expected dividend (dividend yield) 4.6% 5.0% 5.0% 5.6% 5.6% 3.3% 3.3% 4.3% 4.3% 10.0% 10.0%Expected annual departures 10% 15% 10% 10% 5% 10% 5% 10% 5% 10% 5%Fair value per granted instrument determined at grant date £0.91 £0.76 £0.79 £0.64 £0.67 £1.60 £1.75 £0.97 £1.11 £0.48 £0.38

Valuation model Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholesmethodology methodology methodology methodology methodology methodology methodology methodology methodology methodology methodology

Five-yearservice

period andsavings

requirement

Three-yearservice

period andsavings

requirement

Five-yearservice

period andsavings

requirement

Three-yearservice

period andsavings

requirement

Five-yearservice

period andsavings

requirement

Three-yearservice

period andsavings

requirement

Five-yearservice

period andsavings

requirement

Three-yearservice

period andsavings

requirement

Five-yearservice

period andsavings

requirement

Three-yearservice

period andsavings

requirement

Vesting conditions

Five-yearservice

period andsavings

requirement

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34. Share-based payments continuedArrangement Employees' Restricted Share Bonus PlanNature of the Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant ofarrangement shares shares shares shares shares shares shares shares shares shares shares

Date of grant 1/1/03 1/1/04 1/1/04 12/3/04 1/1/05 1/1/05 1/1/05 1/1/06 1/1/06 1/1/06 19/2/08Number of instruments granted 56,966 2,101 2,101 93,192 1,299 1,299 1,304 1,299 1,299 1,304 202,901Exercise price n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aQuoted share price at grant date £2.90 £3.05 £3.05 £3.04 £3.36 £3.36 £3.36 £4.11 £4.11 £4.11 £1.81Contractual life (years) 4.2 3.2 4.2 3.0 2.2 3.2 4.2 2.2 3.2 4.2 4.2

Settlement Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares SharesExpected volatility n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aExpected life at grant date (years) 4.2 3.2 4.2 3.0 2.2 3.2 4.2 2.2 3.2 4.2 4.2Risk-free interest rate 4.1% 4.5% 4.6% 4.4% 4.3% 4.3% 4.3% 4.2% 4.2% 4.2% 11.1%Expected dividend (dividend yield) 4.7% 5.0% 5.0% 5.1% 5.0% 5.0% 5.0% 4.2% 4.2% 4.2% 0.0%Expected annual departures 15% 10% 10% 5% 10% 10% 10% 10% 10% 10% 10%Fair value per granted instrument determined at grant date £2.41 £2.63 £2.50 £2.61 £3.04 £2.90 £2.76 £3.75 £3.59 £3.44 £1.27

Valuation model Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholesmethodology methodology methodology methodology methodology methodology methodology methodology methodology methodology methodology

Achievementof individual

performancetargets in

2007 and stilla member

of staff at the fourth

anniversaryof date of

grant






grant




of staff at the third


grant




of staff at the secondanniversary

of date ofgrant






grant






grant




of staff at the secondanniversary

of date ofgrant

Still amember



grant






grant






grant






grant

Vesting conditions


B21448 R&A 2008 BACK 20/3/09 17:37 Page 84


Totalshareholder

return ofBradford &Bingley plc

compared to a peer group

of companies

Totalshareholder

return ofBradford &Bingley plc

compared to a peer group

of companies

Earnings per sharegrowth ofBradford

& Bingley plc over a three

year periodexceeds

annual RPI growth

by 3%

Achievement of individual

performancetargets andGroup profit

in 2005 and still amember of staff at

the thirdanniversary of

date of grant

Earnings pershare growth

of Bradford & Bingley plcover a threeyear period

exceedsannual

RPI growth by 3%



in 2006 and still amemberof staff at


date of grant

Earnings pershare growth of

Bradford &Bingley plc

over a threeyear period

exceeds annual

RPI growth by 3%

Achievement ofindividual

performancetargets and

Group profit in2007

and still amemberof staff at


date of grant

Earnings pershare growthof Bradford &

Bingley plcover a threeyear period

exceedsannual RPI

growth by 3%

Achievement ofindividual


in 2004 and still amember of staff at


date of grant

Still a memberof staff at the

thirdanniversary of

date of grant

Earnings pershare growthover a 3 year

periodexceeds the

growth in theRetail PriceIndex over the sameperiod by

a minimum of 9%

Earnings pershare growthover a 3 year

periodexceeds the

growth in theRetail PriceIndex over the sameperiod by

a minimum of 9%

34. Share-based payments continuedArrangement Performance Executive Executive Executive

Share Incentive Incentive Share Option

Plan Plan Scheme Scheme

Nature of the Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant of Grant ofarrangement shares shares shares shares shares shares shares shares shares shares shares share options share options

Date of grant 23/2/04 23/2/04 28/2/05 28/2/05 28/2/06 28/2/06 22/2/07 22/2/07 19/2/08 19/2/08 19/2/08 25/2/03 14/8/03Number of instruments granted 871,577 506,666 341,990 341,990 339,111 339,111 490,469 490,469 1,016,503 1,016,503 988,510 1,368,230 59,608Exercise price n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a £2.82 £3.07Quoted share price at grant date £3.10 £3.10 £3.23 £3.23 £4.71 £4.71 £4.60 £4.60 £1.81 £1.81 £1.81 £2.77 £3.09Contractual life (years) 3 3 3 3 3 3 3 3 3 3 3 10.0 10.0

Settlement Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares Shares SharesExpected volatility 30% 30% n/a n/a n/a n/a n/a n/a n/a n/a n/a 32% 31%Expected life at grant date (years) 3 3 n/a 3 n/a 3 n/a n/a n/a n/a n/a 5.0 5.0Risk-free interest rate 4.5% 4.5% n/a n/a n/a n/a n/a n/a n/a n/a n/a 3.8% 4.4%Expected dividend (dividend yield) 5.0% 5.0% 5.3% 5.3% 3.7% 3.7% 4.1% 4.1% 11.1% 11.1% 11.1% 4.9% 4.8%Expected annual departures 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 5% 5%

Fair value per granted instrument £1.40 £1.15 £3.23 £2.77 £4.71 £4.20 £4.60 £4.06 £1.81 £1.27 £1.27 £0.55 £0.65determined at grant date

A Monte Carlo simulation model is used to determine the Performance Share Plan fair value as the arrangements include market-based performance conditions and to assist inassessing an appropriate expected vesting period for the Executive Share Option Scheme. For other share schemes a Black-Scholes methodology is used to value options.The expected volatility of share price applied in the option pricing models is based on historic Bradford & Bingley plc share price data over a period equivalent to the expected lifeof the scheme or since the date of flotation (4 December 2000) if shorter.Awards granted under the Executive Incentive Plan are granted based on performance in the preceding financial year. The performance criteria include qualitative elementswhich are not determined until the award date i.e. after the end of the relevant financial year. The grant date therefore occurs after the employees to whom the award is madehave begun providing services. In accordance with IFRS 2 the grant date fair value is initially estimated for the purposes of recognising the services received during the periodbetween service commencement date and grant date. The fair value is then revised once the actual grant date has been established.

Valuation model Monte Carlosimulation

model

Monte Carlosimulation

model

Share price atthe date the

shares areallocated


shares areallocated

Black-Scholesmethodology



shares areallocated



shares areallocated





Vesting conditions

B21448 R&A 2008 BACK 20/3/09 17:37 Page 85


34. Share-based payments continuedThe following information applies to options which were outstanding at 31 December 2007:

At 31 December 2007 Weighted average

Range of Weighted average Number of exercisable remaining life (years)exercise price exercise price options (000s) Expected Contractual

£2.00 - £3.00 £2.8526 326,230 0.11 4.69

The movements in the number of share options (Executive Share Option Scheme and the Sharesave Scheme) can be summarised as follows:2008 2007

Weighted average Weighted averageNumber of options exercise price Number of options exercise price

Total number of options outstanding at 1 January 2,309,209 £3.2006 2,583,487 £2.8456Granted 6,324,883 £1.4490 847,654 £3.7273Exercised (3,626) £2.3579 (759,614) £2.4917Forfeited (31,195) £3.6119 (187,477) £3.3056Effect of modifications and cancellations (8,599,271) £1.9109 (26,626) £2.8170Expired - - (148,215) £3.5938Total number of options outstanding - - 2,309,209 £3.2006at 31 DecemberExercisable at 31 December - - 326,230 £2.8526In addition to the above option schemes, as at 31 December 2007 the Group had two pre-2003 schemes which were still to mature, namely Executive Share Option Scheme2001 and 2002 schemes. There were 336,742 options outstanding at 31 December 2007, and these were all extinguished as a result of the Transfer. The Sharesave 2003 (5year), Sharesave 2005 (3 year), Employee Restricted Share Bonus Plan 2005 (‘ERSBP’) (3 year) and ERSBP 2006 (2 year) schemes all fully matured during 2008. The Sharesave2002 (5 year) and the ERSBP 2004 (3 year) schemes fully matured during 2007.

The amount recognised in staff costs for share-based payment transactions with employees may be summarised as follows:Group

2008 2007£m £m

Sharesave Scheme 0.1 0.6Employees' Restricted Share Bonus Plan 0.1 0.1Performance Share Plan - -Executive Incentive Plan (2.6) 3.9

(2.4) 4.6Accelerated charge due to extinguishment 4.1 -

1.7 4.6The fair value of the shares for the arrangements in which shares are granted was based on the quoted share price. The accelerated charge of £4.1m (2007: £nil) represents all previously unexpensed costs in respect of share schemes at the point of extinguishment and has been charged torestructuring costs in respect of the ‘Gain/(loss) on sale of assets and liabilities’ (see note 2).


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35. Operating lease commitmentsAt 31 December Group and Company

2008 2007£m £m

The amounts of rentals payable under non-cancellable operating leases are as follows:Payable in less than one year 1.0 8.1Payable in between one and five years 5.5 27.3Payable after more than five years 6.9 35.9Total payable 13.4 71.3These operating leases relate to land and buildings and equipment.

36. Other commitmentsAt 31 December Group Company

2008 2007 2008 2007£m £m £m £m

Irrevocable undrawn loan facilities 1,750.4 1,900.7 37.5 75.7Capital expenditure contracted for but not provided for 0.3 6.6 0.3 6.6The Group’s irrevocable undrawn loan facilities include lifetime mortgages of £1,632.0m (2007: £1,588.4m) for which the commitment reflects an estimate of the interestexpected to roll up on the loans until redemption. The lifetime mortgage product involves the advance of a lump sum, on which interest then accrues but is not payable until theloan is redeemed. There is no commitment to advance further cash in respect of these loans. The loan advance is accounted for in the same way as other loans to customers.The interest is accrued for as it arises.As described in note 11, the Group entered commitments to purchase portfolios of residential mortgages. At 31 December 2008, the Group’s remaining purchase commitmentswere no more than £250.0m from GMAC and £60.0m from Kensington. On 30 January 2009 the Group purchased £39.5m of mortgages from Kensington. On 27 February2009 the Group purchased £248.7m of mortgages from GMAC, extinguishing any commitment to buy any further mortgages from GMAC.The Company has provided a number of financial guarantees to other Group companies. The Directors do not expect any claims to be made against the Company under theseguarantees and hence no provision has been made.

37. Related party disclosuresThe key management personnel of the Group and Company are the Company’s Executive and Non-Executive Directors and senior managers. TheGroup and Company have related party relationships with the key management personnel and with the Group’s pension schemes. In addition,the Company has related party relationships with its subsidiary undertakings; the Company’s principal subsidiaries are listed in note 16, andtransactions between the Company and its subsidiaries are on ‘arms’ length’ terms.

A summary of the remuneration of the key management personnel is set out in the table below. These amounts include the remuneration of theDirectors which is set out in more detail in the Directors’ Remuneration Report on pages 23 to 29. The Directors’ Remuneration Report gives detailsof the Company’s Directors’ salaries, fees, pension entitlements, share options, share plans, other incentives and other benefits. Further details ofthe accounting treatment of pensions are given in note 28, and further details of the accounting treatment of share-based payments in note 34.The Directors’ interests in the Company’s shares are shown on page 32, and the Directors were paid the declared dividends in respect of thoseshares. The key management personnel contributed £74,000 (2007: £98,000) to Group pension schemes during the year.

Details of the Group’s and Company’s transactions and balances with the Group’s pension schemes are given in note 28. There were no amountsdue to or from the schemes at 31 December 2008 (2007: £nil).

Group and Company 2008 2007£000 £000

Salaries and other short-term benefits 4,607 4,144Share-based payment 615 1,731Total 5,222 5,875

The balances due from related parties and value of transactions were as follows:Group Key personnel

2008 2007£000 £000

Debtors outstanding at 1 January 73 232Net movement over the year (71) (159)Debtors outstanding at 31 December 2 73Interest earned 2 12

Company Subsidiaries Key personnel2008 2007 2008 2007

£m £m £000 £000

Debtors outstanding at 1 January 25,989.6 19,648.7 - -Net movement over the year 211.6 6,340.9 - -Debtors outstanding at 31 December 26,201.2 25,989.6 - -Interest earned 958.8 1,110.0 - -The balances with key personnel are mortgages issued on the Group’s usual commercial terms, included within ‘loans and advances to customers’. The debtors due fromsubsidiary undertakings are generally repayable on demand, pay interest at a commercial LIBOR-related rate, and are included within ‘loans and advances to customers’. Noimpairment has been recognised on any of these balances.

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37. Related party disclosures continuedThe balances due to related parties and value of transactions were as follows:Group Key personnel

2008 2007£000 £000

Creditors outstanding at 1 January 1,047 341Net movement over the year (1,047) 706Creditors outstanding at 31 December - 1,047Interest expense 39 23

Company Subsidiaries Key personnel2008 2007 2008 2007

£m £m £000 £000

Creditors outstanding at 1 January 22,420.9 15,334.9 1,047 341Net movement over the year 7,088.7 7,086.0 (1,047) 706Creditors outstanding at 31 December 29,509.6 22,420.9 - 1,047Interest expense 693.3 479.4 39 23The balances with key personnel are savings products issued on the Group’s usual commercial terms, included within ‘other deposits’. All savings balances transferred to Abbeyon 29 September 2008 as described in note 2.The creditors due to subsidiary undertakings are generally repayable on demand, bear interest at a commercial LIBOR-related rate, and are included within ‘other deposits’.

In addition to the interest income and expense shown above, the Company had other transactions with its subsidiaries as follows:2008 2007

£m £m

Dividend income 1.6 1.0Management charges 3.7 2.0Other 6.1 3.2

11.4 6.2

The Company had the following balances and transactions with securitisation vehicles and Bradford & Bingley Covered Bonds LLP:Company 2008 2007

£m £m

Debtors 11,502.4 11,577.3Creditors (28,544.5) (19,348.8)Derivative liabilities (39.3) (44.2)

Net interest expense 664.8 441.6Management and servicing fee income 8.9 3.2At 31 December 2008 the Company held £8,324.7m (2007: £737.5m) of loan notes issued by the Group’s securitisation vehicles on which it earned interest of £262.6m during 2008(2007: £14.1m). At 31 December 2008 the Company held £2,943.0m (2007: £nil) of loan notes issued under the Covered Bond programme, on which it earned interest of £93.8m during2008 (2007: £nil). At 31 December 2007 another Group entity held £500.0m of loan notes issued under the Covered Bond programme on which it earned interest of £8.5m. Loans andadvances to customers of £12,705.4m (2007: £9,221.4m) were securitised during the year. Further information regarding the securitisations is provided in note 12.As described in note 2, as a result of the Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008, all shares in the Company were transferred to the Treasury Solicitor asnominee for HM Treasury on 29 September 2008. The Company therefore considers HM Treasury to be a related party from that date. Details of the Working Capital Facility provided to theCompany by HM Treasury are provided in note 23. The Company and Group have numerous arm’s length transactions with government bodies; these are not disclosed due to the volumeof transactions and balances, and their nature as arm’s length normal business transactions.


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38. Critical accounting judgements and estimatesJudgements:Financial instrument designationUpon initial designation, a certain amount of judgement is required in ascertaining within which category, as prescribed in IAS 39, a financialinstrument should be designated. The IAS 39 categories are detailed in the accounting policies set out in note 1 and the designation is based onthe criteria specified in IAS 39. We note that where financial instruments contain an embedded derivative we have not opted to designate thewhole instrument as at ‘fair value through profit and loss’ which is permissible under the standard.

Qualifying hedge relationshipsIn designating a financial instrument as part of a qualifying hedge relationship the Group and Company have determined that the hedge isexpected to be highly effective over the life of the hedging instrument. In accounting for a derivative as a cash flow hedge the Group andCompany have determined that the hedged cash flow exposure relates to highly probable future cash flows.

Impairment of debt securitiesCritical judgement is applied in determining whether a debt security is impaired. The factors considered in determining whether an asset isimpaired are detailed in note 13.

SecuritisationsIn applying the Group’s policies on securitised financial assets, the Group and Company have considered both the degree of transfer of risks andrewards on assets transferred to another entity and the degree of control exercised by the Group over the other entity:- When the Group, in substance, controls the entity to which financial assets have been transferred, the entity is included in these consolidated

Financial Statements and the transferred assets continue to be recognised in the Group’s Balance Sheet.- When the Company or another Group entity has transferred financial assets to another entity, but has not transferred substantially all of the

risks and rewards relating to the transferred assets, the assets continue to be recognised in the transferring entity’s Balance Sheet.

Details of the Group’s securitisation activities are given in note 12.

Deferred tax assetThe tax charge in the Income Statement and the provision for tax on the Balance Sheet are dependent upon whether or not the Transferconstituted a major change in the nature or conduct of trade for tax purposes. If there was a major change in the nature or conduct of trade, thenthere would be an end of accounting period for tax purposes on 28 September 2008 and an inability to carry forward any tax losses accrued asat that date. This issue is under discussion with HM Treasury and HM Revenue & Customs. Given this uncertainty, deferred tax has not beenrecognised in relation to those tax losses accumulated as at 28 September 2008.

Consideration has been given to whether tax losses pertaining to the period post Transfer are likely to be capable of being offset against futureprofits and therefore whether deferred tax should be recognised in relation to them. Based upon the information that has been provided inrelation to the business plan, the expectation is that there will be sufficient profitability in future years in order to utilise tax losses in the Companyand certain subsidiaries and therefore deferred tax has been recognised accordingly in relation to these post Transfer tax losses.

Estimates:Effective interest rateLoans and advances to customers are accounted for on an effective interest rate basis, under which the income is spread over the loan’sexpected life. On a quarterly basis, models are reviewed to re-assess expected life by portfolio of products based upon actual redemptions byproduct and anticipated market conditions. During the year, the average expected life of a loan increased from 3 years to 6 years. The cumulativeimpact of these changes was an increase in the Balance Sheet amount of loans and advances to customers of £196.0m. As the averageexpected life increases the impact of a further one month increase is reduced since one month becomes a smaller proportion of the totalaverage expected life. At 31 December 2008, if the expected average life of a loan were increased or reduced by one month, the Balance Sheetamount of loans and advances to customers would be increased or reduced by £2.8m respectively.

Loan impairmentThe Group reviews its loan impairment on a monthly basis. Impairment models use actual loss experience to provide both probabilities of defaultsand property forced sale discounts across a portfolio of products. In addition, management applies a risk weighted view on additional factors,such as specific fraud cases. If average house prices were 10% lower than the values at 31 December 2008 or if arrears were 50 basis pointshigher than as at 31 December 2008 the reported impairment charge for 2008 would have been around £56.0m or £29.0m higher respectively.As at 31 December 2008, the reported impairment amount factors in an experienced decrease in average house prices of 16% during 2008, andan assumption that average house prices will fall by 16% in 2009 and a further 6% in 2010. These actual and anticipated house price decreasesrepresented £136.0m of the loan impairment loss reflected in the Group’s 2008 Financial Statements.

Post-retirement benefit obligationsThe net deficit in respect of post-retirement benefit obligations is carried on the Balance Sheet. The value of these obligations is calculated by the Group’sactuaries using the assumptions set out in note 28. Note 28 also discloses the impact on the benefit obligations of changes in certain key assumptions.

ProvisionsProvisions are carried in respect of certain known or forecast future expenditure, as described in note 29.

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39. Capital structureAt 31 December Group

2008 2007£m £m

Tier 1Share capital and reserves 1,158.1 1,210.8Available-for-sale reserve adjustments 348.1 61.9Cash flow hedge reserve adjustments 148.5 60.4Intangible assets adjustments - (41.0)Net pension deficit (10.0) (4.0)Innovative tier 1 149.0 148.8Total tier 1 capital 1,793.7 1,436.9Upper tier 2 capital 584.6 580.1Lower tier 2 capital 676.0 647.0Total tier 2 capital 1,260.6 1,227.1Deductions (55.7) (146.7)Total capital 2,998.6 2,517.3

The values of tier 1 and tier 2 capital above exclude any accounting adjustments arising from the hedging of these instruments.

The primary objectives of the bank’s capital management are to ensure that the bank complies with externally imposed capital requirements, andmaintains capital ratios to support the objectives of the business and to cover risks inherent in its activities. The Group defines Equity, SubordinatedLiabilities and Other Capital Instruments as capital. The Group’s capital is assessed under a Basel II standardised regime.

The bank manages its capital structure in response to changes in the nature of the bank’s activities and economic conditions.

The bank’s capital position is shown above. Tier 1 capital excludes accounting reserves for available-for-sale assets and cash flow hedges butincludes a regulatory deduction for intangible assets. Tier 2 capital reflects amortisation of subordinated debt where appropriate. The Group’scapital adequacy and capital resources are managed and monitored in accordance with the regulatory capital rules of the FSA, the UK regulator.The bank must at all times monitor and demonstrate compliance with the relevant regulatory capital requirements of the FSA. The bank has put inplace processes and controls to monitor and manage the bank’s capital, and capital was adequate throughout the year.

The Company's capital is represented by the capital and reserves attributable to equity holders and is sufficient to meet the needs of the Companyin its operations.

40. Financial instruments(a) Categories of financial assets and financial liabilities: carrying value compared to fair valueGroup Assets at Assets at At 31 December 2008 fair value fair value If fairFinancial assets through profit through profit Total values

Available- or loss - on initial or loss - held Loans and Hedging carrying Fair increasedfor-sale recognition for trading receivables adjustments value value by 1%

£m £m £m £m £m £m £m £m

Cash and balances at central banks - - - 100.4 - 100.4 100.4 1.0Loans and advances to banks - - - 3,349.2 - 3,349.2 3,349.2 33.5Loans and advances to customers - - - 41,826.0 - 41,826.0 41,296.1 413.0Fair value adjustments on portfolio hedging - - - - 561.3 561.3 - -Debt securities 3,968.7 - - - 56.0 4,024.7 4,024.7 40.2Derivative financial instruments - 6,022.9 - - - 6,022.9 6,022.9 60.2Other financial assets - - - 6.1 - 6.1 6.1 0.1Total financial assets 3,968.7 6,022.9 - 45,281.7 617.3 55,890.6 54,799.4 548.0


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40. Financial instruments continued(a) Categories of financial assets and financial liabilities: carrying value compared to fair value continuedFinancial liabilities Liabilities at Liabilities at

fair value fair value If fairthrough profit through profit Liabilities at Total values

or loss - on initial or loss - held amortised Hedging carrying Fair increasedrecognition for trading cost adjustments value value by 1%

£m £m £m £m £m £m £m

Deposits by banks - - 9,318.5 - 9,318.5 9,318.5 93.2Other deposits - - 828.1 - 828.1 828.1 8.3Statutory Debt - - 18,413.9 - 18,413.9 18,413.9 184.1HM Treasury Working Capital Facility - - 2,275.7 - 2,275.7 2,275.7 22.8Derivative financial instruments 1,230.2 - - - 1,230.2 1,230.2 12.3Debt securities in issue - - 20,492.7 173.6 20,666.3 15,600.6 156.0Subordinated liabilities - - 1,250.5 98.2 1,348.7 250.1 2.5Other capital instruments - - 223.6 44.8 268.4 78.0 0.8Other financial liabilities - - 147.8 - 147.8 147.8 1.5Total financial liabilities 1,230.2 - 52,950.8 316.6 54,497.6 48,142.9 481.5

Group Assets at Assets at At 31 December 2007 fair value fair value If fairFinancial assets through profit through profit Total values


£m £m £m £m £m £m £m £m

Cash and balances at central banks - - - 209.2 - 209.2 209.2 2.1Treasury bills 185.0 - - - - 185.0 185.0 1.9Loans and advances to banks - - - 2,392.1 - 2,392.1 2,392.1 23.9Loans and advances to customers - - - 40,444.5 - 40,444.5 40,407.2 404.1Fair value adjustments on portfolio hedging - - - - (53.8) (53.8) - -Debt securities 6,778.7 - - - - 6,778.7 6,778.7 67.8Derivative financial instruments - 1,175.4 - - - 1,175.4 1,175.4 11.8Other financial assets 2.1 - - 658.9 - 661.0 661.0 6.6Total financial assets 6,965.8 1,175.4 - 43,704.7 (53.8) 51,792.1 51,808.6 518.2

Financial liabilities Liabilities at Liabilities at fair value fair value If fair

through profit through profit Liabilities at Total valuesor loss - on initial or loss - held amortised Hedging carrying Fair increased

recognition for trading cost adjustments value value by 1%£m £m £m £m £m £m £m

Deposits by banks - - 2,074.3 0.1 2,074.4 2,074.4 20.7Other deposits - - 24,152.6 - 24,152.6 24,155.1 241.6Fair value adjustments on portfolio hedging - - - (5.9) (5.9) - -Derivative financial instruments 498.6 - - - 498.6 498.6 5.0Debt securities in issue - - 21,652.6 655.5 22,308.1 21,914.6 219.1Subordinated liabilities - - 1,249.2 4.5 1,253.7 1,168.9 11.7Other capital instruments - - 148.9 12.7 161.6 117.5 1.2Other financial liabilities - - 141.4 - 141.4 141.4 1.4Total financial liabilities 498.6 - 49,419.0 666.9 50,584.5 50,070.5 500.7

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40. Financial instruments continued(a) Categories of financial assets and financial liabilities: carrying value compared to fair value continuedCompany Assets at Assets at At 31 December 2008 fair value fair value If fairFinancial assets through profit through profit Total values


£m £m £m £m £m £m £m £m

Cash and balances at central banks - - - 100.4 - 100.4 100.4 1.0Loans and advances to banks - - - 1,380.8 - 1,380.8 1,380.8 13.8Loans and advances to customers - - - 58,622.1 - 58,622.1 58,608.9 586.1Fair value adjustments on portfolio hedging - - - - 561.3 561.3 - -Debt securities 12,217.4 - - - 56.0 12,273.4 12,273.4 122.7Derivative financial instruments - 1,734.9 - - - 1,734.9 1,734.9 17.3Other financial assets - - - 5.0 - 5.0 5.0 0.1Total financial assets 12,217.4 1,734.9 - 60,108.3 617.3 74,677.9 74,103.4 741.0

Financial liabilities Liabilities at Liabilities at fair value fair value If fair

through profit through profit Liabilities at Total valuesor loss - on initial or loss - held amortised Hedging carrying Fair increased

recognition for trading cost adjustments value value by 1%£m £m £m £m £m £m £m

Deposits by banks - - 8,143.9 - 8,143.9 8,143.9 81.4Other deposits - - 30,285.4 - 30,285.4 30,285.4 302.9Statutory Debt - - 18,413.9 - 18,413.9 18,413.9 184.1HM Treasury Working Capital Facility - - 2,275.7 - 2,275.7 2,275.7 22.8Derivative financial instruments 1,309.4 - - - 1,309.4 1,309.4 13.1Debt securities in issue - - 13,169.8 194.2 13,364.0 10,459.0 104.6Subordinated liabilities - - 1,548.6 143.0 1,691.6 403.3 4.0Other financial liabilities - - 134.3 - 134.3 134.3 1.3Total financial liabilities 1,309.4 - 73,971.6 337.2 75,618.2 71,424.9 714.2

Company Assets at Assets at At 31 December 2007 fair value fair value If fairFinancial assets through profit through profit Total values


£m £m £m £m £m £m £m £m

Cash and balances at central banks - - - 209.2 - 209.2 209.2 2.1Treasury bills 185.0 - - - - 185.0 185.0 1.9Loans and advances to banks - - - 1,901.9 - 1,901.9 1,901.9 19.0Loans and advances to customers - - - 51,435.4 - 51,435.4 51,417.7 514.2Fair value adjustments on portfolio hedging - - - - (53.8) (53.8) - -Debt securities 7,398.2 - - - - 7,398.2 7,398.2 74.0Derivative financial instruments - 468.6 - - - 468.6 468.6 4.7Other financial assets 2.1 - - 657.5 - 659.6 659.6 6.6Total financial assets 7,585.3 468.6 - 54,204.0 (53.8) 62,204.1 62,240.2 622.5


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40. Financial instruments continued(a) Categories of financial assets and financial liabilities: carrying value compared to fair value continuedFinancial liabilities Liabilities at Liabilities at

fair value fair value If fairthrough profit through profit Liabilities at Total values

or loss - on initial or loss - held amortised Hedging carrying Fair increasedrecognition for trading cost adjustments value value by 1%

£m £m £m £m £m £m £m

Deposits by banks - - 1,658.5 - 1,658.5 1,658.5 16.6Other deposits 19,279.0 - 24,322.8 - 43,601.8 43,604.3 436.0Fair value adjustments on portfolio hedging - - - (5.9) (5.9) - -Derivative financial instruments 483.2 - - - 483.2 483.2 4.8Debt securities in issue - - 13,897.9 511.2 14,409.1 14,205.4 142.1Subordinated liabilities - - 1,548.1 17.2 1,565.3 1,437.1 14.4Other financial liabilities - - 131.0 - 131.0 131.0 1.3Total financial liabilities 19,762.2 - 41,558.3 522.5 61,843.0 61,519.5 615.2Cash and balances at central banks and loans and advances to banks: the fair value is considered to be their carrying amount, credit risk being considered as part ofimpairment review. Loans and advances to customers: where floating rate loans and advances to customers have been issued at market rates we have assumed fair value approximates to bookvalue, credit risk being considered as part of impairment review. Fixed rate mortgage balances, within loans and advances to customers, are fair valued using discounted cashflow models, using prevailing market rates, with underlying assumptions based on current market conditions. At 31 December 2008, their fair value in respect of interest rate riskis considered to be marginally higher than their carrying value (the fair value adjustment on portfolio hedging being an asset balance of £561.3m). Given current marketconditions, it is not known whether these fair values are reflective of prices that could be achieved on the open market; however, there is no intent to sell these loans.Debt securities and treasury bills: fair value has been estimated through reference to market price or specific restructuring proposals. Where no market price exists anassessment has been made as to the value of the security. This assessment is based on modelling the present value of future expected cash flows, using a discount curveadjusted for credit spread and liquidity, utilising information from a number of sources, including fund manager expectations and the performance of other similar securities.Derivative financial instruments, other financial assets and deposits by banks: the fair value is their carrying amount.Other deposits: the fair value is estimated from expected future cash flows, discounted at current market rates.Statutory Debt and HM Treasury Working Capital Facility: the fair value is assumed to be their carrying amount.Debt securities in issue, subordinated liabilities and other capital instruments: the fair value is based upon quoted market prices in active markets or discounted expected cashflows using market rates applicable to the credit quality and maturity of the instrument. Other financial liabilities: the fair value is their carrying amount.No financial assets were reclassified during 2008 or 2007 by the Group or Company between amortised cost and fair value categories.

(b) Trading bookDuring 2007 the Group commenced trading activities in derivatives. In 2008 this activity ceased. The net trading result for the year, which is allincluded in the Income Statement within ‘realised gains less losses on financial instruments’, was a loss of £1.0m (2007: profit £1.0m).The fair value of these held for trading derivatives was nil at 31 December 2008 and not material at 31 December 2007 and therefore does notappear in note 40.

(c) Interest income and expense on financial instruments that are not at fair value through profit or lossTotal interest income and expense (calculated using the effective interest rate method) on financial instruments that are not at fair value throughprofit or loss were as follows:

Group2008 2007

£m £m

Interest income 3,121.8 2,967.5Interest expense (2,384.4) (2,419.8)Net interest income 737.4 547.7The above includes interest on derivatives which are effective hedging instruments.

(d) Impaired financial assetsAllowance accounts for credit losses in respect of impairment of loans and advances to customers are detailed in note 10, and in respect of debtsecurities in note 14.No impairment loss has been recognised in respect of any other class of financial asset, and no other class of financial asset includes assets thatare past due.

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40. Financial instruments continued(e) Derecognition of financial assetsThe following financial assets have been sold but continue to be carried on Balance Sheet because the sale does not qualify for derecognition;the Group remains exposed to the economic risk on the assets because of the sale terms.

Group 2008 2008 2007 2007Carrying amount of Carrying amount of Carrying amount of Carrying amount of

assets associated liabilities assets associated liabilities£m £m £m £m

Repurchase agreements (see also note 40f) 9,848.4 5,128.3 794.0 744.4Other arrangements - - 168.9 170.8

9,848.4 5,128.3 962.9 915.2

Company 2008 2008 2007 2007Carrying amount of Carrying amount of Carrying amount of Carrying amount of

assets associated liabilities assets associated liabilities£m £m £m £m

Repurchase agreements (see also note 40f) 10,068.2 5,235.3 1,721.4 1,645.9Other arrangements - - 168.9 170.8

10,068.2 5,235.3 1,890.3 1,816.7In addition, loans to customers which have been securitised are not derecognised from the Balance Sheet as the originator of the loans retains substantially all of the risks andrewards of the securitised loans (see note 12).

(f) CollateralAll loans and advances to customers made by the Group are secured on property. The secured property can be repossessed in the event ofborrower default, in which case the carrying value of the loan is reduced if the estimated recoverable amount is lower than the outstandingbalance owed, in accordance with the accounting policy described in note 1. The repossessed property is carried on the Balance Sheet withinloans and advances to customers.

A credit exposure could arise in respect of derivative contracts entered into by the Group if the counterparty were unable to fulfil its contractualobligations. The Group addresses the risks associated with these activities by monitoring counterparty credit exposure and requiring additionalcollateral to be posted or returned as necessary. The only forms of collateral accepted by the Group are cash and government securities. Derivativesare transacted under ISDA with CSA annexes and as such may require collateral to be posted from time to time.

Fair value of collateral which we hold which we can sell or repledge in the absence of default by the owner of the collateral:Group Group Company Company

2008 2007 2008 2007£m £m £m £m

Assets under reverse repurchase agreements - 253.4 - 253.4Cash collateral which we have received in respect of derivatives contracts 392.2 45.2 392.8 67.3

392.2 298.6 392.8 320.7None of the above collateral has been sold or repledged.

Carrying amount of financial assets which we have pledged as collateral:Group Company

2008 2007 2008 2007£m £m £m £m

Assets under repurchase agreements (see also note 40e) 9,848.4 794.0 10,068.2 1,721.4Cash Ratio Deposit with the Bank of England 32.1 38.2 32.1 38.2Cash collateral which we have provided in respect of derivative contracts 1,467.8 90.9 849.7 90.9

11,348.3 923.1 10,950.0 1,850.5In addition, certain loans to customers have been securitised, as detailed in note 12. These loans, and also the other financial assets shown above which we have pledged, arecarried on the Group’s and Company’s Balance Sheets.


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40. Financial instruments continued(g) Hedge accountingThe Group had the following types of hedges:Group 2008

Fair value Cash flow Non- Nominalhedges hedges hedging Total amounts

£m £m £m £m £m

Exchange rate contracts 5,347.5 - 6.4 5,353.9 18,446.9Interest rate contracts 188.7 120.3 360.0 669.0 37,046.3Total asset balances 5,536.2 120.3 366.4 6,022.9 55,493.2Exchange rate contracts 161.9 - 6.3 168.2 1,617.6Interest rate contracts 646.2 325.3 90.5 1,062.0 43,217.4Total liability balances 808.1 325.3 96.8 1,230.2 44,835.0Fair value of hedging instruments 4,728.1 (205.0) 269.6 4,792.7 10,658.2

The Company had the following types of hedges:Company 2008


£m £m £m £m £m

Exchange rate contracts 846.1 - 6.3 852.4 2,895.3Interest rate contracts 322.0 120.3 440.2 882.5 29,688.5Total asset balances 1,168.1 120.3 446.5 1,734.9 32,583.8Exchange rate contracts 161.3 - 6.3 167.6 1,617.6Interest rate contracts 677.3 325.3 139.2 1,141.8 48,989.6Total liability balances 838.6 325.3 145.5 1,309.4 50,607.2Fair value of hedging instruments 329.5 (205.0) 301.0 425.5 (18,023.4)

The Group had the following types of hedges:Group 2007


£m £m £m £m £m

Exchange rate contracts 903.5 - - 903.5 12,119.7Interest rate contracts 225.4 40.4 - 265.8 24,359.5Other derivatives 6.1 - - 6.1 16.8Total asset balances 1,135.0 40.4 - 1,175.4 36,496.0Exchange rate contracts 135.9 - - 135.9 3,432.8Interest rate contracts 165.7 141.5 - 307.2 20,782.8Other derivatives 5.8 - 49.7 55.5 222.6Total liability balances 307.4 141.5 49.7 498.6 24,438.2Fair value of hedging instruments 827.6 (101.1) - 676.8 12,057.8

The Company had the following types of hedges:Company 2007


£m £m £m £m £m

Exchange rate contracts 196.4 - - 196.4 2,957.5Interest rate contracts 225.7 40.4 - 266.1 23,130.3Other derivatives 6.1 - - 6.1 16.8Total asset balances 428.2 40.4 - 468.6 26,104.6Exchange rate contracts 80.0 - - 80.0 935.0Interest rate contracts 205.6 141.5 - 347.1 36,185.0Other derivatives 6.4 - 49.7 56.1 222.6Total liability balances 292.0 141.5 49.7 483.2 37,342.6Fair value of hedging instruments 136.2 (101.1) - (14.6) (11,238.0)

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40. Financial instruments continued(g) Hedge accounting continuedThe Group and Company undertake derivative transactions to hedge risk exposures, and manage risk by use of fair value hedges and cash flowhedges. For those transactions which qualify and are designated as fair value or cash flow hedges, hedge accounting treatment is applied.

Fair value hedges are primarily used to hedge against changes in fair value of fixed rate products due to movements in market interest rates. Forthe year ended 31 December 2008, the Group recognised fair value gains of £18.5m (2007: loss £23.5m), representing the ineffective portion ofthe fair value hedges.

Cash flow hedges are used to hedge the risk of exposure to variability of cash flows attributable to a particular risk associated with a recognisedasset or liability, or a forecast transaction.

Any gains or losses on cash flow hedges are recorded in equity until the hedged cash flow occurs, whereupon they are transferred to profit or lossfor the period. As at 31 December 2008, net losses accumulated in equity were £148.5m (2007: loss £60.4m).

Hedge effectiveness is measured and assessed on an ongoing basis and was determined to be actually effective throughout the year. Changesin fair values and cash flows of the hedged items were almost fully offset by changes in fair values and cash flows of the hedging instruments,and actual effectiveness was within a range of 80% to 125%.

The Group has recognised embedded derivatives within certain products and has classified them with derivatives in accordance with IAS 39,‘Financial Instruments: Recognition and Measurement’.

Prior to the Transfer, forward starting swaps were entered into, in anticipation of the take up of fixed rate mortgages. These were treated as cashflow hedges. Cash flow ineffectiveness testing incorporates testing for forecast transactions which are no longer expected to occur.

Fair value movements on financial instruments recognised in the Income Statement comprised the following:Group

2008 2007£m £m

Net gains/(losses) on fair value hedging instruments 2,879.5 (372.6)Net (losses)/gains on fair value hedged items (2,861.0) 349.2Ineffectiveness on cash flow hedges - (0.1)Net hedge ineffectiveness gains/(losses) 18.5 (23.5)Net gain/(loss) in fair value:

- embedded derivatives (64.1) (49.7)- other 247.1 -

Total fair value gains/(losses) 183.0 (49.7)Total fair value gains/(losses) recognised in the Income Statement 201.5 (73.2)Other fair value movements arose on swaps which are not part of designated accounting hedge relationships.

Realised gains less losses on financial instruments recognised in the Income Statement comprised the following:

Group2008 2007

£m £m

Realised (losses)/gains on available-for-sale instruments (119.6) 4.5Realised gains on instruments at amortised cost 0.3 1.0Realised (losses)/gains on instruments at fair value due through profit or loss (1.0) 1.0Total realised (losses)/gains on financial instruments recognised in the Income Statement (120.3) 6.5


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41. Risk managementA description of the principal risks to which the Group and Company are exposed is provided on pages 19 to 22 which form part of the auditedFinancial Statements.

(a) Financial and market riskThe following table describes the significant activities undertaken by the Group which gives rise to financial or market risk, and the risksassociated with such activities.

Activity Risk Type of derivative instrument used

Funding activities in sterling involving either fixed Sensitivity to changes in interest rates Interest rate swaps and interest rate futuresrate instruments or instruments with embeddedoptions

Fixed and capped rate mortgage lending and Sensitivity to changes in interest rates Interest rate swaps and optionsinvestment activities involving either fixed rate instruments or instruments with embedded options

Investment and funding in foreign currencies Sensitivity to changes in foreign exchange rates Cross-currency interest rate swaps andforeign exchange contracts

Variable rate products Sensitivity to changes in interest rates Interest rate swapsThe accounting policy for derivatives and hedge accounting is described in note 1.

(b) Credit riskBefore taking account of any collateral, the maximum exposure to credit risk as at 31 December was:

Group Group Company Company2008 2007 2008 2007

£m £m £m £m

Cash and balances at central banks 100.4 209.2 100.4 209.2Treasury bills - 185.0 - 185.0Loans and advances to banks 3,349.2 2,392.1 1,380.8 1,901.9Loans and advances to customers 41,826.0 40,444.5 58,622.1 51,435.4Debt securities 4,024.7 6,778.7 12,273.4 7,398.2Derivative financial instruments 6,022.9 1,175.4 1,734.9 468.6Other financial assets 6.1 661.0 5.0 659.6Total on - Balance Sheet 55,329.3 51,845.9 74,116.6 62,257.9Irrevocable undrawn loan facilities (off-Balance Sheet) (see note 36) 1,750.4 1,900.7 37.5 75.7Total maximum exposure to credit risk 57,079.7 53,746.6 74,154.1 62,333.6In respect of loans and advances to banks and customers and derivative financial instruments, the Group and Company may hold reverse repurchase agreements and may alsohold cash as security (see notes 40e and 40f). Loans and advances to customers are secured on property.In respect of lifetime mortgages, the irrevocable undrawn loan facility is calculated using actuarial assumptions. There is no commitment to advance further cash; thecommitment reflects interest expected to roll up on the loans until redemption.

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41. Risk management continued(c) Liquidity riskIt should be noted that many financial instruments are settled earlier than their contractual maturity dates; in particular, many mortgage loans arerepaid early in full or in part.The Group closely monitors its liquidity position against the Board's liquidity policy. This policy sets out elements of available and required liquiditythrough reference to and modelling of net lending commitments, short and medium term wholesale commitments, liquidity reserves, retaildeposit growth and the requirement for other payments (e.g. dividends and tax). From this, minimum and target liquidity levels are established.Furthermore, liquidity is also measured in proportion to the total Balance Sheet and is subject to trigger levels; these determine the appropriatelevels of escalation in order to address any actual or forecast shortfalls. The liquidity policy also requires stress testing through modelling andassessment of any emerging and potentially extreme funding conditions.

The contractual maturities of financial assets and liabilities were as follows:Group In not In more than In more thanAt 31 December 2008 more than three months one year but

three but not more not more than In more thanOn demand months than one year five years five years Total

£m £m £m £m £m £m

Financial assetsCash and balances at central banks 17.3 - - - 83.1 100.4Loans and advances to banks 3,311.0 38.2 - - - 3,349.2Loans and advances to customers - 64.2 284.0 1,452.6 40,025.2 41,826.0Fair value adjustments on portfolio hedging 561.3 - - - - 561.3Debt securities - 859.6 355.8 767.3 2,042.0 4,024.7Derivative financial instruments - 180.8 1,327.1 2,801.4 1,713.6 6,022.9Other financial assets - 6.1 - - - 6.1Total financial assets 3,889.6 1,148.9 1,966.9 5,021.3 43,863.9 55,890.6Financial liabilitiesDeposits by banks 2,304.8 4,444.4 1,123.2 1,446.1 - 9,318.5Other deposits 9.1 96.0 67.7 655.3 - 828.1Statutory Debt 18,413.9 - - - - 18,413.9HM Treasury Working Capital Facility 2,275.7 - - - - 2,275.7Derivative financial instruments - 126.1 205.7 573.3 325.1 1,230.2Debt securities in issue - 156.1 2,916.7 12,771.8 4,821.7 20,666.3Subordinated liabilities - - - 397.2 951.5 1,348.7Other capital instruments - - - - 268.4 268.4Other financial liabilities - 147.8 - - - 147.8Total financial liabilities 23,003.5 4,970.4 4,313.3 15,843.7 6,366.7 54,497.6Group net liquidity gap (19,113.9) (3,821.5) (2,346.4) (10,822.4) 37,497.2 1,393.0Group financial assets at 31 December 2007 730.6 4,371.6 784.5 3,372.3 42,533.1 51,792.1Group financial liabilities at 31 December 2007 15,681.3 2,503.8 11,009.9 16,723.9 4,665.6 50,584.5Group net liquidity gap at 31 December 2007 (14,950.7) 1,867.8 (10,225.4) (13,351.6) 37,867.5 1,207.6



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41. Risk management continued(c) Liquidity risk continuedCompany In not In more than In more thanAt 31 December 2008 more than three months one year but

three but not more not more than In more thanOn demand months than one year five years five years Total

£m £m £m £m £m £m

Financial assetsCash and balances at central banks 17.3 - - - 83.1 100.4Loans and advances to banks 1,342.6 38.2 - - - 1,380.8Loans and advances to customers 26,202.1 55.8 196.0 1,307.4 30,860.8 58,622.1Fair value adjustments on portfolio hedging 561.3 - - - - 561.3Debt securities - 859.6 355.8 1,061.6 9,996.4 12,273.4Derivative financial instruments - 180.8 364.2 929.2 260.7 1,734.9Other financial assets - 5.0 - - - 5.0Total financial assets 28,123.3 1,139.4 916.0 3,298.2 41,201.0 74,677.9Financial liabilitiesDeposits by banks 2,303.5 4,444.4 1,123.2 272.8 - 8,143.9Other deposits 29,519.2 96.0 67.7 602.5 - 30,285.4Statutory Debt 18,413.9 - - - - 18,413.9HM Treasury Working Capital Facility 2,275.7 - - - - 2,275.7Derivative financial instruments - 125.5 212.0 621.0 350.9 1,309.4Debt securities in issue - 86.0 2,732.9 5,723.4 4,821.7 13,364.0Subordinated liabilities - - - 397.2 1,294.4 1,691.6Other financial liabilities - 134.3 - - - 134.3Total financial liabilities 52,512.3 4,886.2 4,135.8 7,616.9 6,467.0 75,618.2Company net liquidity gap (24,389.0) (3,746.8) (3,219.8) (4,318.7) 34,734.0 (940.3)Company financial assets at 31 December 2007 26,476.7 4,334.0 572.8 3,207.5 27,613.1 62.204.1Company financial liabilities at 31 December 2007 35,801.2 1,753.7 9,438.9 10,010.6 4,838.6 61,843.0Company net liquidity gap at 31 December 2007 (9,324.5) 2,580.3 (8,866.1) (6,803.1) 22,774.5 361.1HM Treasury has indicated that it expects the WCF provided to the Company by HM Treasury and the Statutory Debt due to the Financial Services Compensation Scheme to berepaid out of the cash flows generated by the Company and the Group during their wind-down. As explained in notes 23 and 24 it is not possible to specify the contractualmaturity dates of the loans to the Company from HM Treasury and from the Financial Services Compensation Scheme, and they have been included in the table above asthough repayable on demand.

The contractual undiscounted cash flows associated with financial liabilities were as follows:Group In not In more than In more thanFinancial liabilities more than three months one year butAt 31 December 2008 three but not more not more than In more than

On demand months than one year five years five years Total£m £m £m £m £m £m

Deposits by banks 2,304.8 4,497.0 1,181.0 1,532.9 - 9,515.7Other deposits 9.1 102.0 83.4 669.8 - 864.3Statutory Debt 18,413.9 - - - - 18,413.9HM Treasury Working Capital Facility 2,275.7 - - - - 2,275.7Derivative financial instruments - 42.5 (20.5) 387.7 (425.0) (15.3)Debt securities in issue - 310.4 3,366.6 14,130.0 6,765.4 24,572.4Subordinated liabilities - 20.5 61.6 904.2 1,077.1 2,063.4Other capital instruments - 3.2 9.6 51.0 408.1 471.9Other financial liabilities - 147.8 - - - 147.8Irrevocable undrawn loan facilities 118.4 - - - - 118.4Acquisition of mortgage portfolios - 310.0 - - - 310.0Total 23,121.9 5,433.4 4,681.7 17,675.6 7,825.6 58,738.2

Included in the above are the following expected cash flows arising on cash flow hedges (positive = outflow); no impact is anticipated on theIncome Statement due to hedging arrangements.

Cash flow hedges - 18.9 (7.5) 52.9 7.9 72.2

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41. Risk management continued(c) Liquidity risk continuedGroup In not In more than In more thanFinancial liabilities more than three months one year butAt 31 December 2007 three but not more not more than In more than


Deposits by banks 361.5 690.7 374.9 792.5 - 2,219.6Other deposits 15,325.7 1,361.1 5,642.3 2,506.3 - 24,835.4Derivative financial instruments - 41.7 118.7 90.3 (317.4) (66.7)Debt securities in issue - 753.8 6,185.7 15,516.1 5,647.4 28,103.0Subordinated liabilities - 17.2 51.7 389.8 1,632.9 2,091.6Other capital instruments - 2.2 6.7 35.6 365.2 409.7Other financial liabilities - 141.4 - - - 141.4Irrevocable undrawn loan facilities 312.3 - - - - 312.3Acquisition of mortgage portfolios* - 750.0 1,850.0 1,800.0 - 4,400.0Total 15,999.5 3,758.1 14,230.0 21,130.6 7,328.1 62,446.3*The total undiscounted contractual financial liabilities have been amended to include the £4.4bn mortgage commitments that were in place last year.


Cash flow hedges - 0.2 (15.1) (51.0) (8.3) (74.2)

Company In not In more than In more thanFinancial liabilities more than three months one year butAt 31 December 2008 three but not more not more than In more than


Deposits by banks 2,303.5 4,488.2 1,154.6 289.2 - 8,235.5Other deposits 29,519.2 101.7 82.8 638.7 - 30,342.4Statutory Debt 18,413.9 - - - - 18,413.9HM Treasury Working Capital Facility 2,275.7 - - - - 2,275.7Derivative financial instruments - 47.1 (20.5) 165.4 (425.0) (233.0)Debt securities in issue - 186.2 3,019.9 6,658.1 6,765.4 16,629.6Subordinated liabilities - 24.5 73.4 967.4 1,564.1 2,629.4Other financial liabilities - 134.3 - - - 134.3Irrevocable undrawn loan facilities 37.5 - - - - 37.5Total 52,549.8 4,982.0 4,310.2 8,718.8 7,904.5 78,465.3


Cash flow hedges - 18.9 (7.5) 52.9 7.9 72.2

Company In not In more than In more thanFinancial liabilities more than three months one year butAt 31 December 2007 three but not more not more than In more than


Deposits by banks 115.8 575.4 822.1 230.0 - 1,743.3Other deposits 35,691.3 1,147.3 5,504.3 1,832.8 - 44,175.7Derivative financial instruments - 60.0 180.7 154.3 (333.8) 61.2Debt securities in issue - 198.1 3,965.8 9,340.0 5,700.9 19,204.8Subordinated liabilities - 21.5 64.6 458.4 2,171.1 2,715.6Other financial liabilities - 131.0 - - - 131.0Irrevocable undrawn loan facilities 75.7 - - - - 75.7Total 35,882.8 2,133.3 10,537.5 12,015.5 7,538.2 68,107.3


Cash flow hedges - 0.2 (15.1) (51.0) (8.3) (74.2)The above amounts differ from the Balance Sheet carrying values because the Balance Sheet amounts are based on discounted cash flows, and also because the above amountsinclude associated cash flows including interest; future interest rates have been estimated based on the Bank of England base rate at the Balance Sheet date of 2.00% (2007: 5.50%). Subordinated liabilities include perpetual instruments as detailed in note 30. The amounts above assume these instruments will be redeemed on 31 December 2032.



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41. Risk management continued(d) Interest rate riskInterest rate risk typically arises from mismatches between the re-pricing dates of the interest-bearing assets and liabilities on the Group’sBalance Sheet, and from the investment profile of the Group’s capital and reserves. The Group's Treasury is responsible for managing thisexposure within the risk exposure limits set out in the Balance Sheet Management policy, as approved by ALCO and the Board. This policy sets outthe nature of the market risks that may be taken along with aggregate risk limits, and stipulates the procedures, instruments and controls to beused in managing market risk. Market risk is the potential adverse change in Group income or Group net worth arising from movements ininterest rates, exchange rates or other market prices. Effective identification and management of market risk is essential for maintaining stablenet interest income.

It is ALCO’s responsibility to recommend to EXCO strategies for managing market risk exposures and to ensure that the Group's Treasuryimplements the strategies so that the exposures are managed within the Group’s approved policy limits.

The Group assesses its exposure to interest rate movements using a number of techniques. However there are two principal methods: a) a static framework that considers the impact on the current Balance Sheet of an immediate movement of interest rates; and b) a dynamic modelling framework that considers the projected change to both the Balance Sheet and mortgage rates over the following yearunder various interest rate scenarios. The results of these analyses are presented to senior management in order to identify, measure and manage the Group’s exposure to interestrate risk.

Limits are placed on the sensitivity of the Group Balance Sheet to movements in interest rates. Exposures are reviewed as appropriate by seniormanagement and the Board with a frequency between daily and monthly, related to the granularity of the position. For example, the overallGroup Balance Sheet interest rate risk exposure position is monitored monthly whilst several specific portfolios within the Balance Sheet arereviewed more frequently on a daily or weekly basis. This reflects the dynamics and materiality of the various portfolios.

Interest rate risk exposure is predominantly managed through the use of interest rate derivatives, principally interest rate swaps. Interest rateswaps are over-the-counter arrangements with highly rated banking counterparties. The Group also uses asset and liability positions to offsetexposures naturally wherever possible to minimise the costs and risks of arranging transactions external to the Group.

In general, swaps which have been taken out to manage Group interest rate risk are held by the Company even where the related financialinstruments are held by other Group entities. In these cases, the Company's interest rate risk is managed by either creating swaps between theCompany and the entities which hold the instruments or by setting the interest rate terms on loan balances between the Company and thoseentities, in each case in order to reduce the Company's interest rate risk to an acceptable level.

Interest rate sensitivities are reported to ALCO monthly and are calculated using a range of interest rate scenarios, including non parallel shifts inthe yield curve.

The main metric used by management to control interest rate risk is the sensitivity of interest margin over 12 months to a notional 2% parallelmove in market and base rates. As at 31 December this sensitivity was:

Group2008 2007

£m £m

2% increase 184.8 9.72% decrease (182.8) (28.1)The Company ceased its trading book during 2008.The above sensitivities are greater than in previous years as post Transfer there are higher structured balance sheet interest rate exposures.

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41. Risk management continued(e) Foreign currency riskThe Group’s policy is to hedge all material foreign currency exposures by use of naturally offsetting foreign currency assets and liabilities or by theuse of derivatives. Consequently, at 31 December 2008 and 31 December 2007 the Group and Company had no net material exposure to foreignexchange fluctuations or changes in foreign currency interest rates. The impact on the Group’s profit and equity of reasonably possible changes inexchange rates compared to actual rates would not have been material at 31 December 2008 or 31 December 2007.

The sterling equivalent amounts of the Group’s and Company’s financial assets and liabilities denominated in foreign currencies as at 31 December2008 and 31 December 2007 are set out in the tables below, excluding the nominal value of cross-currency interest rate swaps. The net financialassets/(liabilities) in non-sterling currencies largely represents the nominal value of hedging cross-currency swaps excluded from the table.

Group Sterling Euro US$ Other TotalAt 31 December 2008 £m £m £m £m £m

Financial assetsCash and balances at central banks 100.4 - - - 100.4Loans and advances to banks 3,259.4 43.9 45.9 - 3,349.2Loans and advances to customers 41,826.0 - - - 41,826.0Fair value adjustments on portfolio hedging 561.3 - - - 561.3Debt securities 1,194.2 2,427.2 403.3 - 4,024.7Derivative financial instruments 668.7 4,073.0 792.7 488.5 6,022.9Other financial assets 6.1 - - - 6.1Total financial assets 47,616.1 6,544.1 1,241.9 488.5 55,890.6Financial liabilitiesDeposits by banks 8,256.6 1,061.7 0.2 - 9,318.5Other deposits 719.0 86.0 23.1 - 828.1Statutory Debt 18,413.9 - - - 18,413.9HM Treasury Working Capital Facility 2,275.7 - - - 2,275.7Derivative financial instruments 1,027.9 184.2 18.1 - 1,230.2Debt securities in issue 1,009.8 15,147.1 3,108.1 1,401.3 20,666.3Subordinated liabilities 1,348.7 - - - 1,348.7Other capital instruments 268.4 - - - 268.4Other financial liabilities 147.8 - - - 147.8Total financial liabilities 33,467.8 16,479.0 3,149.5 1,401.3 54,497.6Net financial assets/(liabilities) 14,148.3 (9,934.9) (1,907.6) (912.8) 1,393.0

Group Sterling Euro US$ Other TotalAt 31 December 2007 £m £m £m £m £m

Financial assetsCash and balances at central banks 209.2 - - - 209.2Treasury bills 185.0 - - - 185.0Loans and advances to banks 2,203.5 123.6 65.0 - 2,392.1Loans and advances to customers 40,444.5 - - - 40,444.5Fair value adjustments on portfolio hedging (53.8) - - - (53.8)Debt securities 4,308.5 1,867.9 602.3 - 6,778.7Derivative financial instruments 1,129.4 42.4 1.6 2.0 1,175.4Other financial assets 657.1 3.3 0.6 - 661.0Total financial assets 49,083.4 2,037.2 669.5 2.0 51,792.1Financial liabilitiesDeposits by banks 1,118.9 759.0 196.5 - 2,074.4Other deposits 23,936.2 127.2 89.2 - 24,152.6Fair value adjustments on portfolio hedging (5.9) - - - (5.9)Derivative financial instruments 448.5 37.5 9.1 3.5 498.6Debt securities in issue 5,830.6 12,779.9 2,541.9 1,155.7 22,308.1Subordinated liabilities 1,253.7 - - - 1,253.7Other capital instruments 161.6 - - - 161.6Other financial liabilities 119.1 18.6 - 3.7 141.4Total financial liabilities 32,862.7 13,722.2 2,836.7 1,162.9 50,584.5Net financial assets/(liabilities) 16,220.7 (11,685.0) (2,167.2) (1,160.9) 1,207.6



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41. Risk management continued(e) Foreign currency risk continuedCompany Sterling Euro US$ Other TotalAt 31 December 2008 £m £m £m £m £m

Financial assetsCash and balances at central banks 100.4 - - - 100.4Loans and advances to banks 1,292.1 42.8 45.9 - 1,380.8Loans and advances to customers 58,622.1 - - - 58,622.1Fair value adjustments on portfolio hedging 561.3 - - - 561.3Debt securities 9,442.9 2,427.2 403.3 - 12,273.4Derivative financial instruments 881.1 712.0 17.4 124.4 1,734.9Other financial assets 5.0 - - - 5.0Total financial assets 70,904.9 3,182.0 466.6 124.4 74,677.9Financial liabilitiesDeposits by banks 7,082.0 1,061.7 0.2 - 8,143.9Other deposits 30,176.3 86.0 23.1 - 30,285.4Statutory Debt 18,413.9 - - - 18,413.9HM Treasury Working Capital Facility 2,275.7 - - - 2,275.7Derivative financial instruments 1,107.1 184.2 18.1 - 1,309.4Debt securities in issue 1,323.4 10,549.1 90.2 1,401.3 13,364.0Subordinated liabilities 1,691.6 - - - 1,691.6Other financial liabilities 134.3 - - - 134.3Total financial liabilities 62,204.3 11,881.0 131.6 1,401.3 75,618.2Net financial assets/(liabilities) 8,700.6 (8,699.0) 335.0 (1,276.9) (940.3)

Company Sterling Euro US$ Other TotalAt 31 December 2007 £m £m £m £m £m

Financial assetsCash and balances at central banks 209.2 - - - 209.2Treasury bills 185.0 - - - 185.0Loans and advances to banks 1,713.3 123.6 65.0 - 1,901.9Loans and advances to customers 46,314.4 4,304.7 - 816.3 51,435.4Fair value adjustments on portfolio hedging (53.8) - - - (53.8)Debt securities 4,928.0 1,867.9 602.3 - 7,398.2Derivative financial instruments 422.6 42.4 1.6 2.0 468.6Other financial assets 655.7 3.3 0.6 - 659.6Total financial assets 54,374.4 6,341.9 669.5 818.3 62,204.1Financial liabilitiesDeposits by banks 737.0 746.5 175.0 - 1,658.5Other deposits 43,474.1 97.1 30.6 - 43,601.8Fair value adjustments on portfolio hedging (5.9) - - - (5.9)Derivative financial instruments 433.1 37.5 9.1 3.5 483.2Debt securities in issue 2,825.3 10,082.1 346.0 1,155.7 14,409.1Subordinated liabilities 1,565.3 - - - 1,565.3Other financial liabilities 108.7 18.6 - 3.7 131.0Total financial liabilities 49,137.6 10,981.8 560.7 1,162.9 61,843.0Net financial assets/(liabilities) 5,236.8 (4,639.9) 108.8 (344.6) 361.1

(f) Concentrations of riskThe Group has investments in a range of debt securities issued by government bodies, banks and building societies, and in asset-backedsecurities, in both the UK and overseas. UK government securities, bank and supranational securities and bank certificates of deposit comprise59% (2007: 61%) of debt securities held. 63% (2007: 68%) of the asset-backed securities are backed by UK assets.

The Group operated primarily in the UK, and adverse changes to the UK economy could impact all areas of the Group’s business. Residentialloans and advances to customers are all secured on property in the UK. 61% (2007: 59%) of residential loans and advances to customers areconcentrated in the buy-to-let market; the remaining balances are mainly secured on residential owner-occupied properties.

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42. Controlling partyAs a result of The Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008, which transferred all shares in Bradford & Bingley plcto the Treasury Solicitor as nominee for HM Treasury on 29 September 2008, the Company considers Her Majesty's Government to be theultimate controlling party from that date.

43. Contingent liabilitiesOn 20 January 2009 a solicitor's letter was received notifying the Company and certain present and former Directors of a potential claim byapproximately 1,600 former individual shareholders who subscribed for additional shares in the £401m rights issue approved on 17 July 2008.These former shareholders claim to have suffered loss through having been induced to subscribe for shares in the rights issue by allegedlymaterially misleading and/or incomplete statements made in the associated prospectus dated 24 June 2008 as revised and supplemented bythe supplementary prospectus dated 11 July 2008.

Should such a claim result in proceedings which are pursued through the courts and which succeed, the defendant Directors and/or theCompany could be liable in damages to certain former shareholders in the Company who subscribed for shares in the rights issue.

The Company together with its legal advisers are considering the allegations. It is not possible at this early stage to assess the outcome or timingof any conclusion to this matter.


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